Net income margin is the net after-tax income of a business, expressed as a percentage of sales. It is used in ratio analysis to determine the proportional profitability of a business. It is especially useful when tracked on a trend line, to see if there are any spikes or dips in the long-run average net income margin.
An outside analyst can use this information as part of an analysis to decide whether to recommend to investors whether a company’s shares should be bought or sold.
The net income margin formula is:
Net income / Sales
For example, ABC International has net after-tax income of $50,000 and sales of $1,000,000. Its net income margin is calculated as follows:
$50,000 Net income / $1,000,000 Sales = 5% Net income margin
A problem with this ratio is that the net income percentage is usually such a small percentage of the total activity of a business that it can be easily altered by one-time expenses. For example, an unexpected repair bill could take a large chunk out of the expected percentage. Another issue is that this ratio does not necessarily match the amount of cash flow generated by a business, especially if results are being presented using the accrual basis of accounting; consequently, it may be necessary to compare the net income margin to the cash flows information on the statement of cash flows.