What Do We Mean By Net Margin And What Is It Purpose In The Interpretation Of Financial Statement?

September 29th, 2009 Comments off
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Question:

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?

Suggested Answer:

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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Financial Accounting

 
 

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