Net Profit Margin

Net profit is the final profit earned by the business after the deduction of all the expenses of the business. The formula to calculate the net profit of the company is given below.

Net profit = Total Revenue (Sales) + Income from other sources – Cost of Goods Sold – Operating Expenses – Other Expenses – Interest – Depreciation – Taxes.

The above formula gives net profit in absolute terms. However, it does not provide a correct or most optimum barometer for comparison and analysis. Therefore, the calculation of the net profit margin which is represented in the form of a percentage is important. This ratio helps in better comparison and analysis of the performance of the business with the competitors as well as across industries. The formula to calculate the net profit margin is calculated below.

Net profit margin = Net profit / Net sales * 100

Significance of Net Profit Margin

A stable and increasing net profit margin is the strongest indicator of the company’s good financial health. On the other hand, if the net profit margin is decreasing, despite an increase in revenues or stagnant revenues, it is a cause of concern for the company.