How to Use Financial Reports to Calculate Net Profit Margin - dummies

# How to Use Financial Reports to Calculate Net Profit Margin

In the world of financial reporting, the net profit margin looks at a company’s bottom line. This calculation shows you how much money the company has left after it has deducted all expenses — whether from operations related to the production and selling of the company’s products or from nonoperating expenses or revenue not related to the company’s sales of products or services.

For example, one nonoperating revenue item is interest earned on a company’s bond holdings. That money isn’t generated by operations but is still considered earnings. After the operating income line on the income statement, you most likely see a line for interest expense. This line represents the interest the company paid out on corporate debt. You also see income taxes expense, which indicates the amount the company paid in taxes.

These items are two of the biggest charges left to subtract from operating income. The only exception to this rule is if a large extraordinary charge from a special event, such as discontinued operations or the purchase or sale of a division, appears on the income statement. Any extraordinary charges also appear on the income statement after the operating income line.

To find net profit margin, divide net profit by net sales or revenues:

Net profit ÷ Net sales or revenues = Net profit margin

You find the net profit at the bottom line of the income statement; it may also be called net income or net loss. Net sales or revenue is on the top line of the income statement.

You can calculate the net profit margin using numbers from Mattel’s income statement:

\$776,464,000 (Net profit) ÷ \$6,420,881,000 (Net sales) = 12.1% (Net profit margin)

Mattel made a net profit of 10.05 percent on each dollar of sales. Now calculate Hasbro’s net profit margin using numbers from its income statement:

\$335,999,000 (Net profit) ÷ \$4,088,983 (Net sales) = 8.2% (Net profit margin)

Hasbro made a net profit of 8.2 percent on each dollar of sales. Comparing Mattel’s and Hasbro’s net profit margins, Mattel appears to be more successful than Hasbro at generating a net profit per dollar of sales. The key question investors must then ask is whether Mattel will perform as well in the future.