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One of the Most Effective Measure of Profitability is Net Profit Margin Percentage

One of the most effective measure of profitability is net profit margin percentage, which is calculated as a relation of the company’s net profit to its total sales (revenue) (Rich & Jones & Mowen & Hansen, 2009). In different industries, common net profit margins are different. For example, in the retail industry these margins are comparatively low, ranging within average rate interval of 4-7% (Rich & Jones & Mowen & Hansen, 2009).

Let us calculate the net profit margin percentage for Walmart Stores, Inc. for the last 4 years. Table 1 contains the data on the revenue and net profit of Walmart during the given period. The ratio called “Net Profit Margin Percentage” is calculated as net profit divided by revenue.
Data 2007 2008 2009 2010

Revenue $377,023 $404,254 $408,085 $421,849
Net Profit $12,731 $13,381 $14,370 $16,389
Net Profit Margin Percentage 3.38% 3.31% 3.52% 3.89%
Table 1. Walmart Stores, Inc. Revenue, Net Profit and Net
(Walmart Stores Inc. Financial Statements, 2011)
Fig. 1 shows the dynamics of revenue and net profit characteristics of Walmart Stores Inc during the 2007-2010 period.

Figure 1. Revenue and Net Profit of Walmart Stores Inc. during 2007-2010 period

It is useful to trace the dynamics of net profit margin percentage during the 2007-2010 period. Fig. 2 contains the appropriate chart. Polynomial approximation is used to modify the dynamics graph for net profit margin percentage.

Figure 2. Net Profit Margin Percentage of Walmart Stores Inc. during the 2007-2010 period

It is possible to see that although both revenue and net profit of Walmart Stores Inc. increased every year during the given period, there was a decrease in net profit margin percentage in 2008, and then in 2009 and 2010 this ratio has increased. Thus, the use of net profit margin percentage shows the real situation with profitability. It is possible to state that the slight increase of revenue and net income in 2007-2008 took place due to Walmart expansion, both in national and foreign markets, and in 2009 recovery from the global financial recession started, which resulted in higher profitability for Walmart Stores Inc.

References

Rich, J.S. & Jones, J.P. & Mowen, M.M. & Hansen, D.R. (2009). Cornerstones of Financial Accounting. Cengage Learning.
Walmart Stores Inc. Financial Statements. (2011). Available from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?symbol=wmt