What is the net profit margin?

Net Profit Margin represents percentage of net profit in relation to revenue of a business / business segment. Net Profit Margin is a very common measure of company’s profitability and a usual part of financial analysis of a company.

Normally, the higher Net Profit Margin is better and is preferred by Investors and shareholders. However, Net Profit Margin of a company should also be compared to net profit margin of other companies in the same sector with similar size. This comparison provides context in determining the company’s ability to turn revenue into profit. For example, If company’s net profit margin is lower than similar companies, it may indicate that company is bearing higher interest or operating cost.

Note: Net profit is not the actual cash hold by the company.

Net Profit Margin Formula:

Net Profit Margin = (Net profit ÷ Net Revenue) * 100

How to calculate net profit margin?

Follow these easy steps for calculating the net profit margin quickly:

  1. Take a look at its financial statement to find out the net profit of a company. Keep in mind that the data you are looking for may sometimes be found under the “net income” category.
  2. Get data on the net profit. Remember that net profit = total revenue – total expenses, with total expenses including operating expenses, interest expenses, and taxes.
  3. Have a look at the net profit margin formula above. The result of this equation is not an outright number, but rather a percentage of total revenue.
  4. Here is good to go. Employ net profit margin formula by dividing net profit by total revenue, or you use our net profit margin calculator.
  5. Now scroll down to see how to decode your calculations, and learn if there are proper or desirable values of the net profit margin ratio.

It’s quite easy to compare its values over time ,once you employ the net profit margin formula, and see what’s a company’s performance against the market or its main challengers.

An optimal net profit margin ratio:

Unless the profit of a company is negative (i.e., it generates a loss), the net profit margin formula should produce a value from 0% to 100%. In practice, it’s often hard to find estimates larger than 30%. You may be induced to think that the higher your net profit margin, the better for you. Most of the time, you will be right. Keep in mind, however, that typical values of this indicator based on the type of business you are in, along with the overall shape of the economy. If your company faces vicious competition, your net profit margin will perhaps be lower as compared to a situation when you’re the only supplier to the market. As a result of the desirable values of this indicator are entirely relative. It’s also a good idea to compare profitability measures to liquidity indicators, such as the current ratio, to get a broader picture of a company’s financial stability.

Also, net income margin of different enterprises fluctuate significantly across industries. For example, information services in the U.S. reveal on average a fairly high net profit margin ratio of about 12.4%. At the same time, the shipbuilding industry is characterized by a negative value of this indicator, -1.6%. You can check out this great database on margins by sectors prepared by Aswath Damodaran of the Stern School of Business at New York University to see what’s an average net profit margin ratio in multiple sectors of the U.S. economy.

Difference Between Gross Profit Margin and Net Profit Margin.

Gross profit margin:

It is a measure of profitability that shows the percentage of revenue that exceeds the cost of goods sold (COGS). It adorns how successful a company’s executive management team is in generating revenue from the costs involved in producing their products and services. In short, the higher the number, the more efficient management is in generating profit for every dollar of labor cost involved. Taking total revenue minus the cost of goods sold (COGS) and dividing the difference by total revenue. The gross margin result is typically multiplied by 100 to show the figure as a percentage. The COGS is the amount it costs a company to produce the goods or services that it sells.

The gross profit margin is calculated by

Gross Profit Margin= ( ( Revenue-COGS ) / Revenue) * 100

COGS=Cost of goods sold

Net Profit Margin:

The ratio of net profits to revenues for a company or business segment is called the net profit margin .It is expressed as a percentage, net profit margins show how much of each dollar is collected by a company as revenue translates into profit.

Net profitability is an important distinction since increases in revenue do not essentially translate into increased profitability. Net profit is the gross profit (Revenue – cost of goods – minus operating expenses and all other expenses), such as taxes and interest paid on debt. Although it may visible more complicated, net profit is calculated for us and shows up on the income statement as net income.

Net Profit Margin= ( (NI) x 100 ) / Revenue

NI = Net income = R − COGS − OE − O − I − T
R = Revenue
OE = Operating expenses
O = Other expenses
I = Interest
T = Taxes