The after-tax profit margin is a formula that shows the ratio of money a business cleared after operating expenses, taxes and all other costs. The formula itself is simple and can be done with a regular calculator. For investors, this margin is especially important, because it shows how well a company is really doing after it clears all taxes and operating expenses, and is used by many investors to distinguish a thriving company from a failing one.
The after-tax profit margin formula begins by taking the company’s total revenue. This is all the money the company took in for a quarter or year. The operating costs, such as salaries, taxes and rented property, are then subtracted from the total revenue to get the company’s net profit. Net profit is then divided by the total revenue, which leaves the after-tax profit margin percentage.
Experienced investors tend to look at the after-tax profit margin more than total revenue, because this shows whether the company is able to convert money into profit. For example, a business that has an after-tax profit margin of $10 million US Dollars (USD) from $100 million USD has a profit margin of 10 percent. A company that makes $30 million USD from $500 million USD only has an after-tax profit margin of 6 percent. While the second company made more money in total after taxes and operating expenses, the first company shows a better ability to convert money to profits and will generally be trusted more by investors because investors expect a higher return from companies with higher profit margins.
Investors also compare the profit margin from the last statement, or earlier statements, to the newest one to see if a company is gaining or losing profit. Many companies accrue more operating costs as they grow, which decreases the after-tax profit margin. This makes investors wary, because it shows less of an ability to generate profit, which means less money for shareholders.
There is no generalized “good profit margin” percentage. Every business model has a different general profit margin depending on what the business sells. For example, software companies tend to have a higher profit margin than airlines, but there are still many shareholders making money from investing in airlines. The best way to see if a company has a good after-tax profit margin is to compare it to other companies in the same field, such as comparing similar computer companies or retail stores.