Investors looking for portfolio diversification through sector-specific funds can find multiple opportunities within the energy industry – and more specifically, companies operating in the oil and gas drilling sector. It is necessary to analyze certain metrics to understand a company’s level of profitability and make informed investment decisions. One of the measures commonly used to determine a company’s profitability is the profit margin.
Investors can analyze a company’s profit margin or net profit margin by completing a simple calculation that determines revenues. The profit margin of a company is determined by subtracting total expenses from total sales and then dividing that number by total company sales. This profit margin calculation does not take into account common stock dividends, but does include depreciation, taxes and interest expenses. A company’s net profit margin is calculated similarly by subtracting total expenses from total revenue (not sales) and then dividing that number by total revenue. This gives investors deeper insight into how a company is converting its bottom line revenue into profit for shareholders.
As of January 2015, the average net profit margin for the oil and gas drilling industry is 6.1%. The industry average takes into account the profit margins of a number of large-, mid- and small-cap companies, including Diamond Offshore Drilling, Inc (NYSE: DO) with a net profit margin of 7.23, Helmerich & Payne, Inc (NYSE: HP) with a net profit margin of 17.12 and PostRock Energy Corporation (NASDAQ: PSTR) with a net profit margin of 28.16.
The net profit margin of a company is one of the most closely tracked metrics in profit analysis and investors can utilize this information for both individual companies and broad sectors to determine whether an investment is suitable.
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