Tag Archives | net profit margin

Return on Asset

See Also:
Financial Ratios
Internal Rate of Return Method
Net Present Value Method
Net Present Value vs Internal Rate of Return
Required Rate of Return
What The CEO Wants You to Know

Return on Asset Definition

Return on asset (ROA) reveals how much profit a company earned in comparison to its overall asset. The value of ROA varies from industry and company. In general, the higher the value, the better a company is.

Return on Asset Formula

Return on Asset = Net income ÷ Average asset

Or = Net profit margin * Asset turnover

Return on Asset Calculation

Example: a company has $2,000 in net income, and $20,000 in average asset. Return on equity = 2,000 / 20,000 = 10%

This means that has $0.1 of net income for every dollar of asset invested.

Applications

Return on assets measures profit against the assets a company used to generate revenue. It is an important indicator of the asset intensity of a company. A lower ratio means a company is more asset-intensive, and vice versa. Additionally, a more asset-intensive company needs more money to continue generating revenue. Return on asset ratio is useful for investors to assess a company’s financial strength and efficiency to use resources. It is also very important for management to measure its performance against its planned business goals, or market competitors.

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return on asset

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return on asset

Resources

For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com and www.valueline.com.

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Net Profit Margin Analysis

See Also:
Net Profit Margin Ratio
Gross Profit Margin
Opportunity Profit Margin Ratio
Financial Ratios
Net Income
What is Profitability Index (PI)?

Net Profit Margin Definition

The net profit margin, also known as net margin, indicates how much net income a company makes with total sales achieved. A higher net profit margin means that a company is more efficient at converting sales into actual profit. Net profit margin analysis is not the same as gross profit margin. Under gross profit, fixed costs are excluded from calculation. With net profit margin ratio all costs are included to find the final benefit of the income of a business. Similar terms used to describe net profit margins include net margin, net profit, net profit ratio, net profit margin percentage, and more. To calculate net profit margin and provide net profit margin ratio analysis requires skills ranging from those of a small business owner to an experienced CFO. As a result, this depends on the size and complexity of the company.


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Net Profit Margin Calculation

For example, a company has $200,000 in sales and $50,000 in monthly net income.

Net profit margin = $50,000 / $200,000 = 25%

This means that a company has $0.25 of net income for every dollar of sales.

Steve has $200,000 worth of sales yet his net income is only $50,000. By decreasing costs, he can increase net income. In conclusion, he evaluates his decision and decides to implement the online system he was thinking about.

Net margin measures how successful a company has been at the business of marking a profit on each dollar sales. It is one of the most essential financial ratios. Net margin includes all the factors that influence profitability whether under management control or not. The higher the ratio, the more effective a company is at cost control. Compared with industry average, it tells investors how well the management and operations of a company are performing against its competitors. Compared with different industries, it tells investors which industries are relatively more profitable than others. Net profit margin analysis is also used among many common methods for business valuation.

Easily discover if your company has a pricing problem. As you analyze your net profit margin, it’s an opportune time to take a look at you pricing. Download the free Pricing for Profit Inspection Guide to learn how to price profitably.

Net Profit Margin Analysis

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Net Profit Margin Analysis

Resources

For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com and www.valueline.com.

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Net Profit Margin Ratio

See Also:
Net Profit Margin Analysis
Gross Profit Margin Ratio Analysis

Net Profit Margin Ratio

Using the net profit margin ratio formula, though essential, is a fairly simple process. The difficulty is taking steps every day to keep the proper financial information to calculate this and other financial ratios. Use this formula as a net profit margin calculator:

Net profit margin = Net income ÷ Total revenue

Financial calculators exist which can simplify the process of net profit margin calculation.

Net Profit Margin Example

For example, Steve owns a sole proprietorship which provides tech support services for small businesses. His company, serveco, is succeeding and making Steve a living wage. Steve has recently earned as many customers he is willing to handle. He now wonders if he can increase company profits while maintaining all other aspects of his business. He has considered implementing an inexpensive system to access client’s computers online instead of visiting their office. Steve, though not a CPA, is a very competent man. He begins by searching Google for “net profit margin ratio calculator” and eventually finds the information he needs. Steve converts his company records to Quickbooks. His result is the calculation below.

Because companies come in all different shapes and sizes, it is natural to observe that their net profit margins would differ as well. In fact, businesses can have a profit margin of as high as 19% or as low as 5-10%. As one would expect, the companies with the higher net profit margin are the ones that are the best organized. The companies that are the best organized are the ones that are the most efficient. The ones with the least amount of profit margin are, by contrast, the companies that are the least organized and efficient. Though, it must be said though that the ratio can be good or bad for industry that a business is in. For example, a 10% net profit ratio could be good for one industry and bad for another.

Net Profit Margin Rule

As a general rule of thumb, businesses should strive to maintain a net profit margin ratio that is above the average for the industry a business is participating in. At the same time, the business should also try to maintain a trend with that ratio that is improving, at least slowly, over time. Furthermore, a company can maintain a low ratio by finding ways to reduces expenses.

To learn how to price for profit, download our Pricing for Profit Inspection Guide.

Net Profit Margin Ratio

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Net Profit Margin Ratio

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