Net Profit Margins
In times of poor economic performance, it is time to get back to the basics of investing. One of the most important numbers you should be interested in is the net profit margins, I’ll explain why after the jump.
What is the Net Profit Margin?
The net profit margin is the amount of net income declared as a percentage to total revenue. So, if a business were to take in $100 billion in revenue, and have costs of $90 billion, it would make $10 billion for the year. Its net profit margin would then be 10%, as 10% of all money flowing into the business is pure profit.
Some Net Profit Margins by Business
WalMart, the world’s cheapest retailer, operates on net profit margins of just 3.5%. Amazon, which is the world’s cheapest online retailer, has a net profit margin of just around 4.5%. Google, which sells more services and intangible items rather than physical items, reaps a whopping 28 cents per dollar it takes in on sales, or 28%. As you can see, net profit margins vary wildly by business and business model.
Why Net Profit Margins Matter Most in Recession
People always ask me how I feel about the economy. I always reply in the same way, “I love recessions” which generally leaves most people with an empty look. Why would any one ever like recessions?
Well, during times of recession, I get more bang for my buck than I do at any other time, especially in good economic climates. I can go out to eat for almost half the price I could have a few years ago, everything is on sale, and sometimes it gets so bad that some firms have to liquidate and you grab the things you always wanted for pennies on the dollar.
The firms that survive recession the best are those that have thicker profit margins, as when recession sets in, consumers to business purchasers become more loyal to price than they are to a brand. Assume there are two firms, both of which make a very similar product. When it comes down to it, both companies are virtually the same, and both products are nearly identical. So who are you going to buy from? Who are you going to buy from when you’re feeling the economic pain? The one that is the least expensive, of course.
Net Profit Margins Buoy Businesses
Thick profit margins can always be cut, whereas firms with low profit margins cannot feasible cut nearly as much off their products price. So, in recession, start looking for firms with the strongest profit margins and preferably those with the best brand loyalty.
Apple, for instance, has done very well during recession. It offers net profit margins of 22%, whereas phone competitor RIM has net profit margins of 17% and computer competitor Hewlett Packard has a net profit margin just over 7%. Of all these firms, Apple has the strongest brand loyalty as well as the strongest net profit margins. It should come to no surprise why Apple is doing so well.
First, its customers want its product. Second, it has room to cut prices should its customers lose their taste for Apple products. RIM and HPQ, on the other hand, have lower profit margins and lower brand loyalty.
Start Searching
Luckily, Google has made finding net profit margins of any publicly traded firm as easy as knowing its ticker symbol. After entering a ticker symbol on Google Finance the net profit margin will appear on the right hand column under “Key Stats and Figures.”
