What is After-Tax Profit Margin?
After-tax profit margin is the percentage of revenue remaining after all operating expenses, interest, taxes and preferred stock dividends (but not common stock dividends) have been deducted from a company's total revenue.
How Does After-Tax Profit Margin Work?
The formula for after-tax profit margin is:
(Total Revenue – Total Expenses)/Total Revenue = Net Profit/Total Revenue = After-Tax Profit Margin
Let's look at a hypothetical income statement for Company XYZ:
Using the formula and the information above, we can calculate that Company XYZ's after-tax profit margin was $30,000/$100,000 = 30%
Why Does After-Tax Profit Margin Matter?
After-tax profit margin is one of the most closely followed numbers in finance. Shareholders look at after-tax profit margin closely because it shows how good a company is at converting revenue into profits available for shareholders.
One of the most important concepts to understand is that net profit is not a measure of how much cash a company earned during a given period. This is because the income statement includes a lot of non-cash expenses such as depreciation and amortization. To learn about how much cash a company generates, you need to examine the cash flow statement.
Changes in after-tax profit margin are endlessly scrutinized. In general, when a company's after-tax profit margin is declining over time, a myriad of problems could be to blame, ranging from decreasing sales to poor customer experience to inadequate expense management.
After-tax profit margin is often used to compare companies within the same industry, in a process known asanalysis." After-tax profit margin is a percentage of sales, not an absolute number, so it can be extremely useful to compare after-tax profit margins among a group of companies to see which are most effective at converting sales into profits.
If you'd like to read more in-depth information about margin analysis, check out the following:
Gross Profit Margin definition -- learn how gross profit margin is related to after-tax profit margin.
Operating Margin definition -- learn how gross profit margin is related to after-tax profit margin.
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