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Glossary
Profit & cash

Net margin

The bottom line, as a percentage of sales.

Net margin is what is left after absolutely everything: costs, interest, tax, one-offs. It is the number most people quote and the one most vulnerable to manipulation, because every judgement call in the accounts eventually lands here.

The formula
Net margin = Net income ÷ Revenue
Figure

The divergence that precedes most disasters

Y1Y2Y3Y4Y5Reported profitOperating cash

Reported profit climbing while the cash it supposedly generated goes nowhere. Either customers are not paying, or the sales were never really made.

Why it matters

It is the honest summary of profitability, provided you have checked that the profit turned into cash.

The mistake everyone makes

Reading it in isolation. Always check it against operating cash flow.

Related terms

Operating margin
Profit from the core business, as a share of sales, before interest and tax.
Operating cash flow
Cash generated by the actual day-to-day business, before investment and financing.
EPS
Net profit divided by the number of shares, which is your slice of it.

See Net margin on a real company

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