Profitability: Net Profit Margin

Hi and welcome back. Today in this
video, we’re looking at another profitability ratio called net profit margin. Let’s get started. Hi and welcome to this video on
profitability. We’ll be talking about the net profit
margin today. This is a measure of financial health in
a corporation where you’re measuring the strength of
the remaining revenue after all of the expenses are accounted for in an organization. If you pull data from Yahoo Finance on any company, you will see that often a
large bulk of expenses will fall into a category
called selling, general, and administrative expense. There can be other big categories too but this tends to be the biggest one. So how do we calculate this? The numbers for this calculation come
off the income statement, and we would use revenue or sales, which is similar to what we’ve done with
the gross profit margin. And we also now will take the net income number. Let’s take a look at what
that looks like on an income statement. Using Brown-Forman we can see we’re
still using the same total revenue number that we’ve used before in the
gross profit margin video. And now we’re using the net income number, it’s at the very bottom at the income
statement. So how do we calculate this? For Brown-Forman we have the revenue or sales and we have the net income and we take net income and divide it by the revenue. That gives us a net profit margin for
Brown-Forman in 2014, of 22 cents. So for every one
dollar of revenue that they generate they will
keep 22 cents, bottom line. And I’m comparing
this to their gross profit margin, which we calculated in a previous video. And so you can see from a gross profit
perspective they keep 69 cents in 2014, but from the bottom line, net income number, they keep 22 cents and this seems to be fairly consistent for them, at least over the three years that we’ve
been looking at. And so they get to keep around 20 to 22 cents, at least in these years, that we can see, which
seems to be pretty consistent. So they don’t have anything
really unusual that’s happening in those years at all. Now we’ll compare it
to Diageo. Diageo, very similar, even though they are a much larger company in terms of revenue and in terms of net income. Their margins come out to be about the same as Brown-Forman. They’re keeping around 60 cents gross
profit and they’re keeping around 20 cents of net profit. Now here’s where it gets
really interesting. When we take a look at Constellation
Brands we certainly find something that’s very unusual. I had to actually take a moment and
study this one for a bit. In 2014, they had a gross profit margin a 41 cents and they had a net profit
margin of 40 cents. Now that is highly, highly unusual. I had to do a little digging on them to see exactly what happened. So what I found out was that on Yahoo Finance, the financial statements
that are out there, you don’t actually get every single line item on the income statement, or for the
balance sheet, for that matter. And what I found is that they had
something unusual happen in 2014 that pumped up their net profit. And so as you can see in 2013 and
2012, they only keep really, realistically, about fifteen cents net profit. If you do a vertical analysis on all of
these companies you will see that cost of revenue, or the
gross profit, the gross profit that we calculated
before the cost of revenue for Brown-Forman and Diageo is around thirty to forty percent which
is they’re very compatible and they’re selling and
admin is about the same, it’s around 35, 36 percent. But Constellation Brands is quite opposite of that. Their costs and
revenue is higher and their gross profit and well their selling, general, and admin expense,
is a little lower, which is good, but they still only
keep 12 cents, perhaps, of net income, where the other two companies keep about 20 cents, which is much better. They
perform better. Now this doesn’t mean that
Constellation Brands is a terrible company, it doesn’t mean that they shouldn’t be
invested in, it just means that you should, as
investor, know a lot more about how exactly they operate and why
the numbers look like they do. And so as we’ve seen by just
doing some cursory investigations in their SEC reporting that they have some higher bottling
costs, glass costs, and they had an unusual
event happen in 2014 that had to do with their revaluation that they did of an
acquisition. So as you can see here, on this spreadsheet, I have included a link to where you can find the investor information about
Constellation Brands. Also on the link down below you can find
these SEC reports for these three companies so
that if you want to practice yourself, taking a look through them, because like I’ve said before, they’re
really not hard to read and specifically if you have pointed questions, it’s actually pretty easy to find out
what exactly is happening with these companies. So I hope this has
been useful to you, and if you have any questions please
feel free to leave them and I would be happy to chat with you
about any questions you have about these videos, and I look forward to talking with you
on another one. Thank you.

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