For 2008, the company achieved a net margin of 12.5%.
(a) What does net margin mean?
(b) How useful is this net margin when used for interpreting the company’s financial statement.
© Say the company achieved 10.5% net margin in 2007 and 9.5% in 2006 so is it good or bad?
Earlier category on interpretation on financial statements refers.
(a) Actually, the term net margin is the same as the accounting business ratio which is Net profit / net sales of the company X 100%
Net margin reflects a business net profit as a percentage of net sales. It reveals how much the business earn out of every $1 of net sales, AFTER all expenses have been met/deducted.
(b) The purpose or usefulness of the net margin is to show how efficient a company can control all its expenses. To improve the ratio, the business must reduce the proportion of expenses paid out of every $1 of turnover.
© The management has done a good job by increasing the company’s profitability or net margin from year 2006 (9.5%) to 10.5% in year 2008. This is by ensuring that the proportion of expenses paid out of every $1 of turnover has decreased hence the savings from these expenses translated to better net profitabily for the company.
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