Definition of Profit Margin Ratio
The after tax profit margin ratio expresses the company’s net income or earnings as a percent of the company’s net sales. In other words, the after tax profit margin ratio shows the percentage that remains after deducting the cost of goods sold and all other expenses including income tax expense. The calculation is: Net Income after Tax divided by Net Sales.
The profit margin ratio is most useful when it is compared to 1) the company’s profit margin ratios from its earlier accounting periods, 2) the company’s targeted or planned profit margin ratio for the current accounting period, and 3) the profit margin ratios of other companies in the same industry during the same accounting period.
Example of Profit Margin Ratio
Assume that a retailer had the following results in its most recent year:
- Net sales $600,000
- Cost of goods sold $400,000
- Selling, general and admin expenses $150,000
- Interest expense $8,000
- Corporate income tax expense $6,000
The retailer’s profit margin ratio (after tax) for its most recent year was 6%. [$600,000 – $400,000 – $150,000 – $8,000 – $6,000 = $36,000 divided by $600,000.]
