2 Simple Financial Figures You Should Not Miss – Part 2

Every quarter or so (sometimes every six months or so), companies that are listed in Singapore will come out with their updated set of financial statements as part of their earnings announcement.

This update will typically include an income statementbalance sheet and cash flow statement.

At first glance, the plethora of financial figures may look intimidating. But, let’s zoom into a couple of those figures that we can easily sink our teeth into.

In Part 1, we looked at gross margins. Let’s move on to net margins next.

Net margins

The net margin can be derived from numbers you’ll find in the income statement. Its calculation is also simple: Take the net income of a company and divide it with the revenue of the company.

That seems easy enough, doesn’t it? But then again, what does this net margin represent?

Here’s a quick take from the Motley Fool’s own book, “Rule Breakers, Rule Makers”:

“The reward of high gross margins is surpassed only by the treasures of high net margins. This equation [net margin] tells how much profit a company is making after every cost has been subtracted from sales revenues.

If Sunshine Brew Inc. has 12 percent profit margins, it’s making twelve cents on every dollar of sales [beer]. Similarly, if Midnight Pub Inc. has 6 percent profit margins, it is making just six cents in profit on every dollar of sales.

You guessed it: to equal the total profits of the beer [by Sunshine Brew], the pub [Midnight Pub] will have to do twice as much in sales.”

We’ll continue using software solutions provider Silverlake Axis Ltd (SGX: 5CP) and precision component manufacturer Amtek Engineering Ltd (SGX: M1P) as examples.

I have summarized the figures needed to calculate the duo’s net margin for their latest quarter.

Silverlake Axis and Amtek Engineering net margin

Source: Second quarter earnings report from Amtek Engineering and Silverlake Axis

Amtek Engineering made more than five times the revenue of Silverlake Axis, but less than half of the net profit that Silverlake Axis made.

A high gross margin is desirable for most companies but it would be of little consequence if the company squanders the gross profits on promotions, sales expenses and interest expenses associated with the product, in the process driving the net margin to near nothingness.

A good combination of both margins would be ever the more desirable. To learn more about investing and to keep up to date on the latest financial and stock market news, sign up for a FREE subscription to The Motley Fool’s weekly investing newsletter, Take Stock SingaporeAlso, like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.