Vishal Varun (Student) (648 Points)
30 January 20151.There are two kind of formulaes are available to find Net Profit Margin
1st -> Profit after Tax/sales and
2nd-> EBIT(1-T)/Sales .
Which formulae is better and what is the meaning of both please Describe throughly...
2. What is common Stock which Shows in the Balence Sheet on the Liabilities side ?
Refrence IPC SM of FM Chapter
Financial Analysis and Planning Page no.3.42 Illustration 29
Sanat Biswal
(Chartered Accountant)
(1139 Points)
Replied 05 February 2015
Dear Vishal
Here is maning of both formulaes:-
1.NPM=PAT/SALES
In this formula a simple concept is used that the profit remaining after paying off taxes and other costs,i.e. interests and fixed or variable costs...the remaining amount of profit is "PROFIT AFTER TAX"(PAT).Mark the words "AFTER TAX",which means the profit remaining after paying off the taxes and its the ultimate remainder of profits in hand after incurring all other costs including taxes.
And as we know a simple formula frm acc*nts that NPM=NP/SALES...and so it has been just modified into PAT/SALES...AND PAT MEANS THE SAME AS NP AS USED IN ACCUNTS...U CAN RELATE AND INTERPRET BOTH NUMERATORS IN SIMILAR MANNER.
2.NPM=EBIT(1-T)/SALES
This is not actually a formula but a mathematical derivation of the formula stated above in no.-1.
Refer the example below:-
Lets say that Earnings before tax(EBIT)=100000/-,Interest=10000/-,Tax rate=10%,Sales=810000....
Now to find NPM...we would approach simply as follows....
EBIT=100000
(-)Interest=10000
EBT/PBT=90000
(-)Tax( @ 10%)=9000
PAT=81000
Now according to 1st formula NPM=PAT/SALES=81000/810000=10%,
According to 2nd formula NPM=EBT(1-T)/SALES=90000(1-0.1)/810000=81000/810000=10%
(NOTE:In the absence of interest the formula will change to EBIT(1-T)/SALES)
As you can see that the formula No.-2 is actually not a formula but a shortcut approach to PAT by directly deducting tax from EBT or EBIT as the case maybe....
Regarding ur second querry...common stock is nothing but "EQUITY SHARE CAPITAL".Common stock is the term used by the USA for referring to equity share capital used by us in their balance sheet.
Its called common stock as equity share capital is commonly issued to shareholders for increasing share capital....
This is as far I know about this....HOPE ALL THIS HELPS..
CAclubindia
