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Explanation: Net Profit Margin (NPM) is a financial metric that measures the profitability of a company by expressing its net profit as a percentage of its total revenue. It indicates the portion of revenue that translates into profit after all expenses, including operating costs, taxes, interest and depreciation, have been deducted. A higher NPM indicates that a company is more efficient at converting revenue into profit, while a lower NPM suggests lower profitability relative to its revenue.
Companies with high NPM typically operate with low-cost structures, strong pricing power, efficient operations and effective cost management strategies. Industries such as technology, software, pharmaceuticals, and luxury goods often exhibit high NPM due to their ability to command premium prices, maintain high-profit margins, and operate with relatively low expenses.
Companies with low NPM may operate in highly competitive industries with thin profit margins, face pricing pressures or incur high operating expenses relative to their revenue. Examples include retail, hospitality, transportation, and commodity-based industries where profit margins are typically narrower due to intense competition, high operating costs or volatile market conditions.
To analyse trends in profit margins, it’s essential to track changes in NPM over time and compare them with industry benchmarks, historical performance and peers. Increasing NPM trends indicate improving profitability, efficiency gains or successful cost-cutting initiatives, while declining NPM trends may signal deteriorating profitability, rising costs or pricing pressures. Additionally, analysing the drivers behind changes in NPM, such as shifts in revenue mix, cost structure, pricing strategies or operational efficiency, provides valuable insights into a company’s financial performance and competitive position.
Example: TCS has a Net Profit Margin (NPM) of 18.69% as of FY23. This indicates that TCS earns a profit of approximately 18.69% for every rupee of revenue generated. TCS’s relatively high NPM is indicative of its strong profitability, efficient operations and effective cost management practices within the technology sector. Analysing trends in TCS’s NPM over multiple periods can help investors assess the company’s financial health, profitability trajectory and competitive positioning within the IT industry.
You can view the quarterly and annual Net Proft Margin percentage for any company on Radar in the Quarterly Results or Yearly P/L sections.