Q: What exactly does "Net Margin" mean?
A: A net margin, or net profit margin, is the amount of profit or loss per dollar of sales. In 2017, Sierra Products’ net profit margin was 10.53%, which means it earned a profit of 10.53 cents on every dollar of sales it made in 2017. In 2018, its net profit margin dropped to 5.34%. It earned only 5.34 cents on every dollar of sales in made in 2018. At a lower net profit margin, the company has fewer dollars per each dollar of sales to meet a range of additional expenses, such as long-term debt repayment and distributions to owner for payment of income tax on company profit.
Q: What's the significance of a negative leverage ratio?
A: If a leverage ratio is negative, it means that net worth is negative. Negative net worth is a major red flag.
Negative net worth means that the company’s total assets are less than its total liabilities since net worth, in general terms, is defined as total assets minus total liabilities. Therefore, if the company declared bankruptcy, it would not have sufficient cash from the liquidation of assets to pay down all its obligations.
Course overview: Recording Transactions and Creating the Balance Sheet and Income Statement