The Net Profit Margin Finance Essay

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Net income / net profit is often expressed as a percentage. These figures underline the effectiveness of the company is in control. When the net profit margin is big business is better to convert back to real benefits. An important way to compare companies within the same industry is the net profit margin, these companies are generally subject to similar conditions. But to compare companies in different sectors, the net is also a good way to gauge which industries are relatively more profitable.

As an internal comparison, most of the profit margin is used. In different units, it is difficult to accurately compare the rate of net margin. Different units are required to have different costs, as each operating company and funding varies so much, so that may have little meaning in relation to one another. A little mark a small margin of safety: higher risk that falling sales will erase profits and result in a net loss.

The basic elements to calculate the gross margin is gross profit and net sales. Net sales means sales less sales performance. Gross is the difference between turnover and cost of goods sold. Consumption of goods in connection with a commercial enterprise would be equal to the opening inventory plus purchases minus ending stocks as well as all direct costs associated with purchasing. In the case of the production company would be equal to the sum of the cost of raw materials, wages, costs and all direct manufacturing costs. In other words, are generally charged to income or expenses, are excluded from the calculation of cost of goods sold.

The liquidity ratio is more conservative than the current ratio, better known liquidity because it excludes inventory from current assets. Inventory is excluded because some companies find it difficult to convert their assets into cash. If the short-term bonds to be paid immediately, there are circumstances in which the current report in May overstate its financial strength in the short term.

DEBTOR days:

Most companies with a majority (or all) of their sales on credit. Day debtor is a measure of the average time of payment. An increase in debtor days can be a sign that the quality of accounts receivable of the Company are in decline. This could mean a higher risk of default (it is not paid at all). It could also be an indicator of liquidity could weaken or more working capital will be needed.

This ratio is often expressed in one of two forms. One is the collection of debtor days, debtor days to pay:

(Receivables from sales ÷) - 365

The second is the percentage of sales outstanding:

(trade receivables ÷ sales) - 100

Generally lower debtor days figure is better. The comparison of the same company at different periods are the most frequently used. Comparisons of firms in different sectors is rarely significant as the differences are generally very well because of the nature of different businesses.


Day creditor, a measure similar to the time the debtor. This is the average time it takes for a company to pay its creditors. Ie:

(trade creditors on annual contracts ÷) - 365

The problem is that the level of annual purchases are rarely detected and not included in any financial statements required (a value statement will reveal this, but they are rare). This means it is usually necessary to use a proxy for the annual purchase. Cost of goods sold is often used. This is certainly true when the company is solely a transaction price of goods sold is only the cost of purchase. For companies such as producers, it would probably be inaccurate (too pessimistic).

When companies do not disclose the price of goods sold, provided it has a lower gross margin and selling can be used as a proxy. This still requires all the conditions of use of consumer products as a proxy to be true, and that could be used as a proxy for the purchase, and it will always be less accurate of the two.


Turnover ratio and inventory turnover rate of stocks is the same. This relationship is a relationship between the cost of goods sold in a period of time and cost of average inventory during a given period. It is expressed in number of times. Stock turnover ratio / turnover ratio of stocks is the number of times the stock has been reversed during the period and assess how effectively a company is able to manage its inventory. This ratio indicates whether the investment in equipment is in proper limit or not.


   Formula for calculating the ratio of sales of fixed assets:


Disposals of fixed assets = sales / assets.


Sales to assets ratio is often called the turnover ratio of assets.

Sales to assets ratio is included in the declaration of spreadsheets analyzing financial ratios highlighted in the left column, which contains formulas, definitions, calculations, charts and explanations of each report.


    Average number of days goods remain in inventory before being sold. As a measure of short-term sales potential, a number of industry standards indicate problems with the sales forecast. And a number of sub-standard shows lower sales owing to its inability to meet demand. Also known as days inventory covers days, or days sales inventory. Formula: Average Inventory x 365 ÷ sales

Return on capital employed:

The funding is to return on capital employed (ROCE) is used as a measure of profitability that every company clear its invested capital. It is generally used as a means to compare performance between companies and evaluate whether a company produces enough money to pay its cost of capital.


Debt ratio:

A general term describing a financial ratio that compares one or another form of equity (or capital) to borrowed funds. The transmission is a measure of financial leverage, demonstrating the extent to which a company's activities are funded by the owner of creditor funds.

Return on total assets (ROTA)

An earnings ratio that measures a company before interest and taxes (EBIT) compared with its total net assets. The ratio is considered an indicator of how efficiently a company uses its assets to generate earnings before contractual obligations to pay.


One indicator of how quickly a company converts various accounts, in cash or sales. Generally, the sooner managers can turn assets into cash or sold, the more effective is the company works.