What is Net Margin?
The net margin is a profitability ratio that shows a company’s accounting profit at the end of a reporting period.
How to Calculate Net Margin
The net margin is calculated by dividing net income by net sales, both found on a company’s income statement.
How to Interpret Net Margin
As a rule of thumb, a company able to consistently achieving a net margin above 5% can be considered highly profitable, and is likely to have an economic moat [Pat Dorsey].
However, certain industries such as the retail industry are known to have notoriously low net margins of below 5%. Still, retail companies like Costco and Walmart are highly profitable. They make up for low net margins by achieving high asset turnover ratios.