Net margin

Profitability

The share of revenue that ends up as bottom-line profit.

Formula

Net margin = net income ÷ revenue

Why it matters

Net margin is the final score after every cost — operations, interest, and taxes. It feeds directly into earnings per share and into most valuation multiples. Persistently high net margins are hard to sustain without some protection from competition, so a decade of 15%+ margins is itself evidence of a moat. Net margin is also the profitability input in our quality score.

What good looks like

Above 15% is a high-margin business (worth the full 15 profitability points in our quality score). 8–15% is good. 2–8% is thin, and below 2% means the company earns almost nothing per dollar of sales. As always, compare within an industry: a 4% net margin is normal for a grocer and alarming for a software company.

Caveats

Net income is the most manipulated line on the income statement: tax one-offs, asset sales, revaluations, and legal settlements all land here. A single year's net margin can mislead badly — look at several years. For companies with large non-cash charges (amortization from acquisitions, for example), FCF margin often gives a truer picture of profitability.