What Is an After-Tax Profit Margin?

What is an after-tax profit margin?

An after-tax profit margin is a ratio. To calculate a company’s after-tax profit margin, you’ll need to divide the company’s net income by net sales. One of the after-tax profit margin benefits is that it shows how well a company is controlling its costs. 

Another name for after-tax profit margin is the company’s net margin. Net margin measures how much net income or profit is generated as a percentage of the company’s revenue. Net profit margin is usually shown as a percentage, but you may also see it in decimal form when reading company reports and filings. Another after-tax profit margin benefit is that it illustrates how much of each dollar of a company’s revenue translates into profit.

Understanding After-Tax Profit Margin

After-tax profit margin is easily calculated using the following formula: 

(Total Revenue – Total Expenses) / Total Revenue = Net Profit / Total Revenue 

This is how you find a company’s after-tax profit margin. When you divide net profit by total revenue, you’ll be able to see how much revenue made it to the company’s bottom line. When revenue hits the bottom line, that’s typically good for investors.

The business definition of after-tax profit margin requires an understanding of the definition of a few key accounting concepts. A company’s net income is its total income minus taxes, expenses, and cost of goods sold (COGS). Sometimes, this is called “the bottom line” because it’s usually displayed as the last or bottom line on an income statement. 

You also need to know how to identify net sales to calculate after-tax profit margins. Net sales are the total amount of a company’s gross sales, minus the business’s returns, allowances, and discounts. The net sales number is an essential tool for forecasting sales. It can also help companies with loss-prevention strategies.

Why does after-tax profit margin matter?

An after-tax profit margin is one of the most closely followed numbers in finance. This ratio matters because it shows how good a company is at converting revenue into profits. Obviously, this is a key concern for shareholders.

An after-tax profit margin is also used to compare companies within the same industry. Investors can use these ratios to compare after-tax profit margins among a group of companies. This analysis helps shareholders to see which business among a group of similar companies is most effective at converting sales into profits.

After-Tax Profit Margin: Summary

• After-tax profit margin is calculated by dividing net income by net sales. 
• This ratio is also known as net margin. 
• After-tax profit margins of companies in the same industry can be compared by investors in a “margin analysis” to identify top performers at converting sales into profits.