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Creating a Portfolio Like Warren Buffett: A High-Return Investment Strategy by Jeeva Ramaswamy

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CHAPTER 9

Stock Research Checklist—Profit Margin

Net profit margin is a simple calculation that tells investors how much net profit is generated from each dollar of revenue.

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If a company increases its earnings, that is obviously a good thing. The next thing you need to identify is whether or not a company can maintain that profit margin. A company can increase revenue and earnings by undercutting the competitors, but that is not profitable for the shareholders. The company cannot do that for the long term.

What Is the Company’s Net Profit Margin for the Last 10 Years? Does the Company Generate a Consistent Upward-Trend Profit Margin or at Least Maintain an Average Profit Margin?

For example, take Company X. It earned $100 million net income from $1 billion in revenue in one year:

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Next year, the company increased earnings to $150 million from $2 billion in revenue:

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Company X’s net profit margin decreased from 10 percent to 7.5 percent, which is not a good thing.

Now we can calculate the net profit margin for Coca-Cola (KO) for 10 years.

2000: 10.6%
2001: 19.8%
2002: 20.3%
2003: 20.7%
2004: 22.1%
2005: 21.1%
2006: 21.1%
2007: 20.7%
2008: 18.2%
2009: 22.0%

KO’s average net profit margin for the ...

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