Impact Of Net Profit Margin On Stock Prices Decoded
Date: 14-03-2017 Views: 1071
What every stocks investor must know about the financial ratio net profit margin and why it is so important while making investment in a stock as well as tracking its performance through the stock price.
Edited transcripts UDAYAN RAY Welcome to FundooMoney, your 24X7 buddy on all matters related to personal finance. In this web series, we are discussing various things people need to keep in mind while investing in stocks. And in this particular segment we are going to be talking about a ratio, a term, which is quite important. You get to hear it every now and then when there are discussions about stock market results, company results. It is basically net profit margin. What is this all about? And why should we be bothered? That’s coming up shortly.
Net profit margin, now this is one term that one comes across whenever there is discussion of a company’s results. What should an investor make of something called a net profit margin? To help us understand, we have got with us our stock market expert, Mohit Satyanand.
Hi Mohit!
MOHIT SATYANAND Hi Udayan!
UDAYAN RAY Mohit, net profit margin. Now net profit margin, that means something is getting minused out to arrive at the…..it’s a reduced version, it’s a residual kind of a profit. Isn’t it? And then, there’s a margin. What is this all about? What is this all about and why should a person be bothered about it in an investment?
MOHIT SATYANAND See, in the eventual analysis it’s really net profit that matters to me. Because that is an index of how much money the company has available either to plough back into its operations or to pay out by way of dividends. So, finally its net profit margin that matters and not, gross profit margin. But obviously there is a very clear link between the two.
UDAYAN RAY When people are talking about margin, Mohit, it’s basically per unit of sales or….
MOHIT SATYANAND Yeah, per unit of revenue is the best way to look at it, and part of it is, of course taxes, which used to be an instrument of control of companies. But as the tax code has got more and more simplified, there is not that much difference between the net margins or between the amounts that one company pays out by way of taxes. So, the difference is how much capital I borrowed, and therefore what my finance costs are. It’s what taxes I pay and the bottom line. The net profit is the bottom line, and therefore, it’s critical.
UDAYAN RAY Okay.
MOHIT SATYANAND It’s absolutely critical. But I don’t think it’s an either/or (in terms of) gross profit or net profit. If I am analysing a company, I am going to obviously start with the gross profit margin. But at the end of the day, I need to look at the kind of charges that the company is placing on its gross profit before the net profit is available to the shareholder.
UDAYAN RAY Well there you are. Net profit margin is a very, very critical term that you need to lookout for, when you are investing in stocks. Just in case there is a better explanation for it, please share it with us. We would love to know how it can be explained, because after all the community, and other people in the channel, would be able to know and will get to get a better perspective. If you have liked the video go right ahead and click on the like button. Of course we would love to have you subscribe to our channel. There are regular updates, video updates and audio updates on the channel. And apart from that please stay connected with us on all leading social media platforms.
