After Tax Profit Margin – Definition

Cite this article as:"After Tax Profit Margin – Definition," in The Business Professor, updated January 10, 2020, last accessed October 22, 2020, https://thebusinessprofessor.com/lesson/after-tax-profit-margin-definition/.

Back to: ACCOUNTING, TAX, & REPORTING

After-Tax Profit Margin

The after-tax profit margin refers to the revenue and financial performance of a company after the net income has been divided from the net sales. The net income refers to the income left after taxes have been paid. The after-tax profit margin measures how effectively a company controls its cost, this profit margin shows how much revenue a company has left after its net income is divided by its net sales. If the after-tax profit margin of a company is high, it indicates that the company is effective in managing.

A Little More on What is After-Tax Profit Margin

The after-tax profit margin also shows the amount of per dollar sales a company earns. Generally, the after-tax profit margin shows the total revenue left in a company after all expenses have been paid, including taxes. The efficiency of a company in managing its costs will determine what the after-tax profit margin will look like. It is, however, important to know that the after-tax profit margin is not a gauge of the overall performance of a company but only reflects how well it handles its costs. When used alongside other metrics, the after-tax profit margin can be used to determine the overall health of a company.

What Are Net Income and Net Sales?

Net sales are otherwise called net revenue, this is the total amount a company earns from selling goods and offering services to its customers. Net income, on the other hand, is also called net profit, this is the amount that is left over for a company after all expenses, losses, and gains, taxes and other liabilities have been accounted for.

In business, the profitability of a company is measured through net income. The net income is the last line item on an income statement, it shows the balance a company has left after taxes have been paid and other expenses including the costs of goods (COGS) have been removed.

How Do After-Tax Profit Margins Work?

The after-tax profit margin is calculated by dividing net income by net sales. Hence, if the net income of Company A is $400,000 and the net sales $600,000, the after-tax profit margin is; $400,000/$600,000. The after-tax profit margin of a company is not static, this is due to the fact that the net income and net sales of the company can increase o otherwise.

Investors consider the after-tax profit margin of a company, it serves as a signal that a company handles its costs well or not. If the after-tax profit margin is high, the company manages its costs weel but when it is low, it is an indicator that the costs of a company are not efficiently managed.

Reference for “After-Tax Profit Margin”

https://www.investopedia.com/terms/a/aftertaxprofitmargin.asp

https://investinganswers.com/financial-dictionary/…/after-tax-profit-margin-2232

https://marketbusinessnews.com/financial-glossary/after-tax-profit-margin/

www.investorwords.com/15141/after_tax_profit_margin.html

https://financial-dictionary.thefreedictionary.com/After-tax+profit+margin

Academics research on “After-Tax Profit Margin”

Corporate inventive output, profits, and growth, Scherer, F. M. (1965). Corporate inventive output, profits, and growth. journal of political economy, 73(3), 290-297.

Financial objectives of small firms, Cooley, P. L., & Edwards, C. E. (1983). Financial objectives of small firms. American Journal of Small Business, 8(1), 27-31. Goals perceived by business managers in practice may differ from those postulated in finance theory. Such a divergence between practice and theory is found in a perceptual survey of small-business managers. This paper reports on the financial goals perceived as important by small-business managers and discusses the implications of the findings.1

Artificial neural network vs linear discriminant analysis in credit ratings forecast: A comparative study of prediction performances, Kumar, K., & Bhattacharya, S. (2006). Artificial neural network vs linear discriminant analysis in credit ratings forecast: A comparative study of prediction performances. Review of Accounting and Finance, 5(3), 216-227. The purpose of this paper is to perform a comparative study of prediction performances of an artificial neutral network (ANN) model against a linear prediction model like a linear discriminant analysis (LDA) with regards to forecasting corporate credit ratings from financial statement data.

Predicting corporate bankruptcy: an analytical and empirical evaluation, Rose, P. S., & Giroux, G. A. (1984). Predicting corporate bankruptcy: an analytical and empirical evaluation. Review of Financial Economics, 19(2), 1.

The ultimate competitive advantage of continuing business model innovation, Mitchell, D., & Coles, C. (2003). The ultimate competitive advantage of continuing business model innovation. Journal of Business Strategy, 24(5), 15-21. Discusses the idea that continuing business model innovation provides a parallel way to outperform the competition. Improving a company’s business model by redirecting its focus will mean that competitors will be left out of position and unable to respond effectively.

Was this article helpful?