What is Net margin?
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In short
Net income ÷ revenue: how much profit is left from every $100 of sales after all costs and tax.
Also known as: profit margin
Net margin is the bottom-line result of a business: how much profit is left from every $100 of sales after all costs (cost of goods, salaries, marketing, research, interest) and tax have been paid.
Formula
- Net margin = Net income ÷ Revenue × 100%
Net income sits on the last line of the income statement, which is why it is called the "bottom line".
How to read it
Margins form a ladder: gross margin → operating margin → net margin. Each step shows which costs eat the most money. For example, if gross margin is high but net margin is low, the problem may not be the product but heavy overhead or interest on debt.
Limitations
Net income is affected by one-off events: selling a business unit, a legal settlement, a tax benefit. In such a quarter net margin looks artificially high or low. So also look at a multi-year average and at operating margin. Net income divided by the share count gives EPS.
Of every $100 in sales, $20 is left after costs, expenses and tax. The higher the margin, the more efficient the business.
One year of the fictional company Nur Tech. Of every $100 in sales, $40 goes to cost of revenue, $35 to operating expenses and $5 to tax — $20 is left for shareholders.
Example
A fictional company, annual figures:
- Revenue: $500M
- Gross profit: $300M
- Operating expenses (salaries, marketing, research): $220M
- Operating income: $300 − $220 = $80M (operating margin 16%)
- Interest: $5M, tax: $15M
- Net income: $80 − $5 − $15 = $60M
Net margin: $60M ÷ $500M = 12%. So $12 of net profit remains from every $100 of sales. With 50M shares outstanding, EPS = $60M ÷ 50M = $1.20.
Mistakes and tips
Check for one-off gains or losses — watch for "one-time", "impairment" and "gain on sale" lines in the report.
Compare net margin with competitors in the same industry; normal levels differ sharply between industries.
Net income can be positive while cash flow is negative — compare it with free cash flow.
Frequently asked questions
- What does a negative net margin mean?
- The company lost money over the period: its expenses exceeded its revenue. This is common in young growth companies, but when they turn profitable is the key question.
- Is net margin the same as ROE?
- No. Net margin measures profit against revenue, while ROE measures it against shareholders' equity.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
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