A key measure of a company's performance is its net profit margin or its 'bottom line'.
It's called the bottom line because it's the final number on a company's income statement.
The net profit is the total of all the company's income from sales, investments, and so forth, minus the costs of goods sold and other expenses. That figure is then expressed as a percentage of revenue.
This is important to investors because ASX 200 shares with healthy, growing levels of profitability are more likely to record consistent share price growth and pay strong dividends to shareholders.
According to Westpac's stock screener, the top two ASX 200 shares for profit margin are Atlas Arteria Group (ASX: ALX) with a profit margin of 228.7% and Macquarie Group Ltd (ASX: MQG) with a profit margin of 70.8%.
Let's look at the financial performance of these ASX 200 shares and what's happening with their prices.
Atlas Arteria
Atlas Arteria is a global toll road operator that owns five toll roads in France, Germany, and the United States. It is one of the few ASX 200 shares in the infrastructure space.
The company reported a net profit of $267 million and toll revenue of $116.7 million for full-year FY22. This gave it a profit margin of 228%.
For the record, a company's profit can be higher than its revenue when it has earnings coming from places other than its primary source of revenue (i.e., the goods or services it sells). These might include interest on cash balances and returns on investments.
Last week, Atlas Arteria CEO Graeme Bevans delivered a presentation at the 2023 Macquarie Australia Conference that revealed rising volumes of traffic as economies around the world recover from COVID.
The Atlas Arteria share price is up 4.3% over the past year and up 1.9% in the year to date.
Macquarie
Macquarie is a diversified international financial services company.
Last week, Macquarie reported a net profit of $5,182 million and revenue of $7,418 million for full-year FY23. This gave it a profit margin of 70.8%.
Macquarie is often referred to as the fifth bank of the big four ASX 200 bank shares. It is known for paying solid dividends, and this year is no different.
Macquarie will pay a final dividend for FY23 of $4.50 per share (40% franked) on 4 July. Its total FY23 ordinary dividend is $7.50 per share (40% franked).
The Macquarie share price is down 1.3% over the past year but up 7.9% in the year to date.
Foolish takeaway
It's important to note that profit margins vary across industries. A profit margin of 50% to 70% is considered healthy for many ASX 200 shares. But that would be low for technology shares.
ASX 200 shares in the services sector can achieve gross margins in the 90%+ range due to low costs.
It's also crucial to look at the history of a company's profit margin to ensure you're only buying ASX 200 shares that are healthy, growing businesses, not the one-hit wonders of a particular year.
In your research, you may encounter companies with temporarily high-profit margins caused by external and usually short-term factors. These include things like high commodity prices and the boom in online retail and home food delivery services during the years of COVID-19 lockdowns.
The ideal ASX 200 share for investment is one with a solid history of a consistently rising profit margin.
