In this post, we look at the net profit margin of stocks that are in the banking industry group and listed on the Nigerian stock exchange. Before going into the post, itself, however, I would like to take a philosophical detour.
While preparing for this post, I had taken the “road to sophistication” and identified one financial ratio I thought would be very successful – the free cash flow yield. It turns out I was quite mistaken – sophistication does not always translate to success. I ran into so many problems, from consistent data identification to the comparability of results, that ultimately, I had a lot more questions than answers.
After an entire week of trying to solve the puzzle, I thought, why not try something from the basics? To that end, I will be making a shoutout to my buddy and sparring partner – Ahmed Olaitan Banu – who is as “crazy about the markets” as I am. We got talking and he reminded me of how he starts his analysis of Nigerian stocks. He compares the company’s gross profit to its total revenue! Simple right? Yes – and that simplicity inspired me to write about the net profit margin of Nigerian banks. Going back to the basics, truly. Thanks, Ahmed!
What is “net profit margin”?
The net profit margin is a ratio that helps us to determine the quality of the overall profit made by the business after all the expenses have been paid. It is represented as a percentage and asks a simple question – “for every hundred naira of sales that a company made, how much was left as profit?”.
Calculating this ratio is relatively easy. It requires two primary items from a company’s income statement (statement of financial performance). These items are:
- Total revenue (Total sales) – This number represents how much money a company was able to generate, in sales, during the accounting period under review. The period could be the company’s last fiscal quarter, last fiscal year, or trailing twelve months.
- Net income (profit before tax) – This represents how much money the company is able to retain from revenue, within the same financial period identified in the revenue section, after accounting for all expenses incurred within that same period.
When these figures are identified the net income is divided by the revenue and the result is presented as a percentage, i.e.
Net Profit Margin = (Net income / Total Revenue) * 100
Interpreting the results.
As stated earlier, the ratio helps determine the quality of the profit made. It does this by assessing the company’s expenses (or costs) relative to its revenue. To arrive at net profit, a company will subtract all expenses (its direct cost of doing business as well as other indirect general and operational costs) from its revenue.
While the expenses are not stated in the net profit margin calculation, they are a big component of it. It, therefore, suggests that there is an inverse relationship between the company’s expenses and its net profit margin. If the expenses are high, the net profit margin will be low and vice versa.
Another important factor to consider with net income margin is that it is tied to revenues. If a company is able to keep its costs constant but able to generate more revenue, it will have a higher profit margin. There is, therefore, a direct relationship between revenue and net profit margin.
By looking at the ratio, investors can target companies that are able to generate more profits from their revenue. This is so because the higher net income margin entitles the investors to more dividends, ultimately. Whether the company decides to pay is an entirely different discussion.
Net profit margin has issues too.
As with all financial ratios, this ratio, too, is useless on its own. You need to compare it with that of other firms to get any value. Investors can compare companies’ net profit margins with their peers (direct competitors) across:
- Their geographical locations (Where the companies “do business”).
- Industry group (The type of products or services that the company creates or sells)
- Size (Market capitalization), etc.
Making the net profit margin a useful ratio is not achieved by comparisons with peers only. Investors can compare a company with itself, by comparing its values from one financial period to another financial period.
Without these comparisons, the ratio will be of little use to the investor because it would simply be a number without any meaning.
The net profit margin of Nigerian companies.
Now, to the interesting part. This post would not be complete if it was “all about the theory” of net income calculation. I guess that most readers will be like “where are the top companies nau?”. We have you covered. As usual, we collected the data for all listed Nigerian companies and have computed the values for their net profit margin.
The data collected included net profit, total revenue, and industry group classification for all the companies. We had to decide on which period to collect the data for. Remember that the net profit margin needs a basis for comparison; either by peer comparison or period-to-period comparison. To conduct a peer-to-peer comparison, the data collected needs to be for a comparable period. Therefore, we collected data for each company, from the last twelve months. The net profit margin was calculated and the top 10 companies are presented below.
Highlights of the results.
The results were filtered to remove companies whose net income was negative (net loss, instead of net profit). We also removed companies that we could not get enough information to reasonably compute their ratios. Finally, JAPAULGOLD was removed because its business classification changed during the period under review and it would have been in between groups. Having accounted for all these, some of the key observations that were made include:
- The diversified financial industry group has the highest median net profit margin (52%). It should be noted, though, that there were only two companies in the group that we could account for – UCAP and STANBIC.
- The energy industry group has the lowest median margin (2%). There are six companies that we accounted for and 11 Plc had the highest net profit margin (6%) in the Energy industry.
- AFRIPRUD has the highest ratio (62%), retaining ₦2.26 billion in profits out of ₦3.68 billion revenue – impressive stuff, right?
- RAKUNITY has the lowest net profit margin (0.03%), retaining ₦565,000 in profits out of ₦2.25 billion.
- The median ratio for the 75 companies that we could account for was 12%. Since 75 companies account for less than half of the total listed companies, it can be estimated that the median net profit margin could be significantly lower than 12%. Is this good for the markets?
If you would like to download the full result (excel file), please click this link.
Takeaways from the net profit margin results
Net profit margin figures tell us how much of the company’s revenue has been retained for the shareholders of the company after deducting all the costs that the company requires to generate that revenue. The higher the margin, the better. A higher net profit margin implies a company that could have more money to pay its shareholders (dividends), transfer to other reserves, or maybe re-invest in the business.
If you are a dividend hunter, you could be well served by identifying companies that sit at the top of this kind of table as they are the most likely to pay dividends.
Till our next post, invest responsibly.
