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After-tax profit margin – definition and meaning

After-tax profit margin is one of many financial performance ratios. The ratio reveals the total revenue remaining after deducting expenses, interest, dividend payments, and tax payments from sales. The term should not be confused with profit margin – their meanings are not the same.

Profit margin (net margin, net profit margin, or net profit ratio) refers to the net profit as a percentage of net revenue. It is the percentage of selling price that converted to profit. In other words, by how much the revenue from sales exceeds a company’s costs. Profit margin is a company’s profitability.

The Free Dictionary by FARLEX has the following definition:

“A measure of how well a company controls its costs after taxes. It is calculated by dividing the company’s net income (profit after taxes) by its net sales.”

“A high after-tax profit margin often means the company controls its costs well and provides a value for the shareholder’s investment. However, a low after-tax profit margin is not necessarily a negative sign.”

After-tax profit margin

Calculating after-tax profit margin

To calculate after-tax profit margin we use the following equation:

Net Income after Tax ÷ Net Sales

Most investors need to know what the after-tax profit margin ratio of a company is. They need to know because it allows them to compare a company’s performance to earlier accounting periods.

Additionally, investors can determine whether or not the business has managed to reach its target ratio. Furthermore, the ratio allows them to see how the company is faring compared to its main rivals.

For example, John Doe Inc. might report significantly higher revenue compared to the previous accounting period. However, if costs have risen at a higher rate, its after-tax profit margin will be lower.

A low margin is one of many key indicators that a company should be controlling its costs more effectively.

Video – Profit Margin