When reviewing the overall strength of a particular firm, financial analysts typically examine the net profit margin. This statistic is generally calculated as the ratio of a firm’s net profit after taxes (net income) to its revenue, expressed as a percentage. For example, a 20% net profit margin means that a firm has a net income of $0.20 for each dollar of sales.
A net profit margin can even be negative if the firm has a negative net income. In general, the higher the net profit margin, the more effective the firm is at converting revenue into actual profit. The net profit margin serves as a good way of comparing firms in the same industry, since such firms generally are subject to the same business conditions. However, financial analysts also use the net profit margin to compare firms in different industries in order to gauge which firms are relatively more profitable. The accompanying table shows a portion of net profit margins for a sample of clothing retailers; the entire data set, labeled Net_Profit_Margins, can be found on the text website.
Data for Case Study 2.2 Net Profit Margin for Clothing Retailers
Firm ............. Net Profit Margin (in percent)
Abercrombie & Fitch ..... 1.58
Aéropostale ........ 10.64
Wet Seal .......... 16.15
In a report, use the sample information to:
1. Provide a brief definition of net profit margin and explain why it is an important statistic.
2. Construct appropriate tables (frequency distribution, relative frequency distribution, etc.) and graphs that summarize the clothing industry’s net profit margin.
3. Discuss where the data tend to cluster and how the data are spread from the lowest value to the highest value.
4. Comment on the net profit margin of the clothing industry, as compared to the beverage industry’s net profit margin of approximately 10.9% (Source:biz.yahoo, July 2010).