Net Profit Margin

Definition

Net profit margin (or profit margin, net margin, return on revenue) is a ratio of profitability calculated as after-tax net income (net profits) divided by sales (revenue). Net profit margin is displayed as a percentage. It shows the amount of each sales dollar left over after all expenses have been paid.

Net Profit Margin, a metric that assesses a firm's proficiency in transforming revenue into profit, is determined by dividing net profit by total revenue. This resultant fraction, expressed as a percentage, illuminates the portion of each dollar earned that remains after taking into account all costs, including taxes, overhead, and operating expenses.

A robust net profit margin signals effective cost management and a potential for substantial profits derived from revenue. Conversely, a weak net profit margin suggests inefficiencies in cost control and/or mispricing of products/services.

For investors, Net Profit Margin serves as a vital indicator of a company's financial stability and its capacity to yield profits. It can be leveraged to compare the performance of firms in the same industry, although it's crucial to recognize that factors such as size, cost structure, and product portfolio can affect the net profit margin, so comparisons must be made with discretion.

Net profit margin is a key ratio of profitability. It is very useful when comparing companies in similar industries. A higher net profit margin means that a company is more efficient at converting sales into actual profit.

Net Profit Margin Calculation

The formula for net profit margin is as follows:

Both variables are shown on the income statement (statement of comprehensive income).

Negative net profit margin means that a company’s total expenses exceed its total revenue, resulting in a net loss. This is an indication that the company is not generating enough revenue to cover its costs, and that the company is likely to suffer financial losses.

A lofty Net Profit Margin may not consistently indicate a thriving financial status or achievement for a firm. Though it does imply that a substantial profit is being derived from revenue, there could be other elements at work such as stringent cost reduction strategies, inadequate investment in research and development, or undervaluing goods and services. To grasp a complete picture of a company's financial standing, it's necessary to consider multiple financial metrics and scrutinize the company's complete financial statements.

Exact Formula in ReadyRatios Analysis Software

Net profit margin = F2[ProfitLoss]/F2[Revenue]

F2 – Statement of comprehensive income (IFRS).

Industry benchmark

The average net profit margin for the companies has varied over the past few years. For example, Microsoft had a net profit margin of 22.3% in 2019, while Apple had a net profit margin of 23.2%.  Google фтв Amazon had a net profit margin of 21.9% and 13.4%, respectively, in 2019.

You can find industry benchmarks for profit margin in our reference book.

Note that Net Profit Margin is not an appropriate indicator for non-profit organizations as it measures the efficiency in generating profit from total revenue, which is not applicable to non-profit organizations as they do not have a profit motive. Instead, non-profit organizations may use metrics such as program expense ratios, overhead ratios, and fundraising efficiency to evaluate their financial performance and allocate resources towards their mission.

What is the Difference Between Net Profit Margin and Gross Profit Margin?

Net profit margin is the ratio of net profit to total revenue, while gross profit margin is the ratio of gross profit to total revenue. Net profit is calculated by subtracting total expenses from total revenue, while gross profit is the difference between total revenue and the cost of goods sold.