Formula
Net margin = net income ÷ sales × 100 (%)
With sales of KRW 1 trillion and net income of KRW 100 billion, the net margin is 10%.
Definition
Net margin (net profit margin) is net income divided by sales, showing as a percentage how much of the company's sales is finally left as profit. A net margin of 10% means KRW 100 is left as final profit from KRW 1,000 of sales.
If operating margin looks only at profit from the core business, net margin looks at the bottom line after interest expense, taxes and one-off gains and losses are all reflected. It measures the profit actually left after the core business, the burden of debt and taxes.
Reading operating margin and net margin together shows where profit leaks. A high operating margin with a much lower net margin signals that interest expense or one-off losses ate into the profit of the core business. Jupick does not put net margin directly into the grade, but treats it as a companion for interpreting operating margin.
How to read it
A higher net margin means more profit is kept relative to sales. Net margin varies widely by sector, though. Thin-margin, high-volume distribution and construction tend to come out low and software and luxury goods high, so comparisons within the same sector are accurate.
The gap between operating margin and net margin hints at what happened outside the core business. A wide gap means interest, taxes or one-off gains and losses had a large effect.
Net income sometimes includes gains on asset disposals or valuation gains and losses unrelated to the core business. So when one year's net margin spikes, it is worth checking for one-off factors inside it.
Points to watch
- Net income can include one-off gains and losses unrelated to the core business, so a multi-year trend is safer than one year's net margin.
- Net margins differ widely by sector, so they are hard to compare across sectors as is.
- A loss makes net margin negative. In that case the reason for the loss needs to be traced in the income structure.