After-tax profit margin is a financial metric used to measure the percentage of revenue after all expenses, including taxes, have been deducted. This is used to get an insight into the company’s efficiency in converting sales into net income and offers a clear picture of its profitability after accounting for tax obligations. The below formula is used for calculating the after-tax profit margin
Net Income X 100 / Revenue
Let us imagine that we are running a lemonade stand. Each day at the end, we count the money that has been made, that is, revenue, and then subtract all the costs that have been incurred for lemons and sugar. The costs also include the taxes that have to be paid. What remains is the profit. The after-tax profit margin allows us to know what percentage of total sales is the money that we get to keep. It is like figuring out how much of every dollar that we are making is pure profit after paying the government’s share.
The after-tax profit margin is used widely in the analysis of corporate performance, evaluation of investments, and comparative financial studies in economics. It allows the investors, analysts, and managers to assess the financial health and operational efficiency which is crucial for making investment decisions and strategic planning. This metric is also useful for valuable comparison of the profitability across companies and industries by adjusting the impact of tax policies.
Suppose, a company generates Rs. 1,00,000 in revenue and has a net income of Rs. 10,000 after taxes, and the after-tax profit margin would be 10%. This indicates that for every rupee of sales, the company earns 10 paise in profit. When two companies in the same industry are compared where one has a profit margin of 15% and the other has a profit margin of 10% can indicate which company is more efficient at converting sales into actual profit when all costs and taxes are considered.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy.