What Is an After-Tax Profit Margin?

After-tax profit margin is a financial performance ratio calculated by dividing a company's 澳洲幸运5官方开奖结果体彩网:net income by its 澳洲幸运5官方开奖结果体彩网:net sales. A company's after-tax profit margin is significant as an indicator of how well it manages its costs. After-tax profit margin is also referred to as 澳洲幸运5官方开奖结果体彩网:net profit margin. 

What an After-Tax Profit Margin Indicates 

A high after-tax profit margin generally indicates that a company is being run efficiently, providing more value in the form of profits to shareholders. The after-tax profit margin alone is not an exact measure of a company's performance or determinant of the effectiveness of its cost control measures. However, taken along with other performance measures, it can help create a useful picture of the overall health of a company. 

This financial measure communicates how much income a company is earning per dollar of sales. Some industries inevitably have considerable costs. As a result, their margins may be low. However, that does not equate to poor control of costs. For this reason, it is important for investors to compare a company's after-tax profit margin only with other companies in its industry rather than with companies in general.

For example, the average net margin in the aerospace and defense sector was recently calculated at 4.05%, while the average for the pharmaceutical drugs sector was 18.35%. So an aerospace💟 company with a net margin of 5% is doing well relative to its category, while a drug maker with a 15% margin is performing relatively poorly.

How to Calculate an After-Tax Profit Margin

The formula for calculating a company's after-t♒ax profit margin is si🍒mply:

$\begin{aligned}\text{After-tax profit margin} = \frac{\text{net income}}{\text{net sales}}\end{aligned}$After-tax profit margin=net salesnet income​​

Net income is the company's total income minus taxes, expenses, and the 澳洲幸运5官方开奖结果体彩网:costs of goods sold (COGS). It is often referred to as the 澳洲幸运5官方开奖结果体彩网:bottom line because it is the final line item on an 澳洲幸运5官方开奖结果体彩网:income statement. Expenses include wages, rent, advertising, insurance, etc. Costs of goods sold are the costs associated with the production of products. Such costs include, but are not limited to, raw materials, labor, and ꦛoverhead.  

Net sales, the other component for calculating after-tax profit margins, is the total amount of 澳洲幸运5官方开奖结果体彩网:gross sales after subtracting returns, allowances, and discounts. Also factored in net sales are deductions for damaged, ꦆstolen, and missing products. The net sales figure can be a good♊ indicator of what a company expects to attain in sales for future periods. It is an essential factor in forecasting, and it can also help identify inefficiencies in loss prevention.

Example of an After-Tax Profit Margin

Company A has a net income of $2 million and $3 million in net sales revenue. Its after-tax profit margin is 66% ($2,000,000 ÷ $3,000,000). The following year, the company's net income increases to $3 million and its net sales increase to $5 million. Its new after-tax profit margin is 60%. 

When the growth of net income is disproportiona💝te to sales growth, the after-tax profit margin will change. In this case, it has decreased. To an inves💃tor or analyst, it appears that the company is not doing as good a job as before at controlling costs, although there may be other explanations.

In the first case, the company earns $0.66 in profit for every dolꦇlar of sales. However, in the second case, it makes only $0.60 of profit for every dollar of sales.

After-Tax Profit Margin vs. Pre-Tax Profit 𝓡Margin 

The after-tax profit margin is the net profit margin, including taxes. The 澳洲幸运5官方开奖结果体彩网:pre-tax profit margin is similar, except that it excludes taxes. The pre-tax profit margin is useful when comparing companies that have meaningfully different tax rates, such as those of different sizes and scale, or those operating in different countries and tax jurisdictions. 🎉

For example, corporations in Pennsylvania pay a top 澳洲幸运5官方开奖结果体彩网:marginal income tax rate to their state of 8.99%, while those in neighboring West Virginia, pay a top marginal rate of 6.50%, according to the Tax Foundation. In addition to income taxes, companies may be subject to other state taxes, which can also vary from one state to another.

Pre-tax profit margin can also be more useful in comparing the same company's performance over time, especially if tax rates or penalties have varied during that period. The reasoning behind using the pre-tax profit margin is that tax payments have little to do with the efficiency of a company because they are not something that the company has much control over. 

The Bottom Line

After-tax profit margin, or net profit margin, is an important indicator of a company's financial performance—in particular how effectively it manages its costs. It can be useful in comparing a company's profitability over time and in relation to its competitors in the same industry.