What Is Net Profit Margin?

Net profit margin (otherwise known as net margin) is a measure of how much profit (or net income) a business generates. Most often, the net profit margin is shown as a perc🧔entage but it may also be represented by a decimal.

The net profit margin shows how much of each dol▨lar a business earns actually translates into profit. It’s calculated by dividing a company’s net income by its total re⛦venue and multiplying that figure by 100.

We’ll🔥 take a deeper dive into the net profit margin formula, including🤡 both hypothetical and real examples later in this article.

How Net Profit Margin Works 

Net profit margin is one of the most comprehensive profitability metrics, as it includes all factors of a company’s operation. Carefully tracking fluctuations in net profit margin allows businesses to determine whether their current strategy is effective and accurately predict profits based on current revenue.

Since net profit margin is typically express🤪ed as a percentage, it’s simple to compare the profitability of two or more companies෴ even if they vary in size and scope.

Net profit margin includes all the below factors in a business's operations:

• Total revenue
• 澳洲幸运5官方开奖结果体彩网:Cost of goods sold (COGS) and various additional expenses
• 澳洲幸运5官方开奖结果体彩网:Investment income and any income earned from secondary operations
• Any interest expenses incurred on debt
• Corporate tax expenses
• Timely payments for unusual events, such as business structuring or legal expenses

A business’s net profit margin is an important metric for investors to determine the profitability of a company and whether or not the business is a good investment. Generally, if a business has a growing revenue, but its operating expenses are increasing, its net profit margin will decrease. Maintaining a strong record of increasing profit margins coupled with shrinking expenses may make a business more attractive to prospective 澳洲幸运5官方开奖结果体彩网:investors.

Formula and Calculation for Net Profit Margin

To calculate net profit margin, use the following formula:

$\begin{aligned} \text{Net profit margin} &= \frac{R - COGS - E - I - T}{R}*100\\ &= \frac{\text{Net income}}{R}*100\\ \textbf{where:}\\ R &= \text{Revenue}\\ COGS &= \text{The cost of goods sold}\\ E &= \text{Operating and other expenses}\\ I &= \text{Interest}\\ T &= \text{Taxes} \end{aligned}$Net profit marginwhere:RCOGSEIT​=RR−COGS−E−I−T​∗100=RNet income​∗100=Revenue=The cost of goods sold=Operating and other expenses=Interest=Taxes​

澳洲幸运5官方开奖结果体彩网:Where:

• Net Income = Revenue - all costs and expenses (including COGS, operating expenses, taxes, interest, and any other costs).
• Total Revenue = The total sales or revenue generated by the company.

1. Subtract the cost of goods sold (COGS), operating expenses and other expenses, interest owed, and any applicable taxes from the total revenue.
2. Divide that result by total revenue.
3. Turn that figure into a percentage by multiplying it by 100.

Examples of Net Profit Margin

Here’s a hypotꦑhetical ex༺ample of net profit margin for Company X:

• Revenue: $150,000
• COGS or cost of goods sold: $30,000
• Operating costs: $30,000
• Interest: $5,000
• Tax liability: $18,000
• Net profits: $67,000

In this case, Company X’s net profit margin is 44.6% ($6💖7,000 ÷ $150,000 x 100). A 44.6% profit margin indicates that a business earns around 44 to 45 cents in profit for every dollar it collect𝓀s. 

Here’s a real-world exampleꦇ of net profit margi𝓡n:

Source: Microsoft

Pictured above is the financial statement for Microsoft Corporation for the three months ending September 30, 2024 (left column labeled 2024):

• 澳洲幸运5官方开奖结果体彩网:Net sales (total revenue) was $65.6 billion (top section of the chart).
• Net income was $24.7 billion for the period (bottom section of the chart).
• Microsoft’s net profit margin is calculated by dividing its total net income of $24.7 billion by its net sales (total revenue) of $65.6 billion and multiplying that figure by 100.
• So, Microsoft’s net profit margin for the period was 37.7% ($24.7 billion ÷ $65.6 billion × 100).
  

Net Profit Margin vs. Gross Profit Margin

澳洲幸运5官方开奖结果体彩网:Gross profit margin is how much money is left over from 𓄧total revenue after subtracting the cost of goods sold (COGS). COGS measures the direct cost🃏s associated with the production of goods and services. It may include elements such as labor costs and material costs, and it is deducted from the total revenue to calculate profit.

However, it doesn’t include a company’s overhead costs, including employee salaries or advertising expenses, for example. It🌄 often appears as a second line item on a company’s income statement, after the sales revenue.

Gross profit margin is calculated by subtracting net sales from the COGS (which equals the gross margin) and dividing that figure by the net sales.

Here’s how ❀to calculate the gross profit margin:

It’s represented as a percentage of net income remaining as profit after accounting for the COGS. Unlike net profit margin, gross profit margin helps♑ determine how much profit is generated from a business’s goods and services since it does not include overhead costs whereas net profit margin does.

Pros and Cons of Net Profit Margin

Pros	Cons
May help with understanding whether the current business strategy is working.	Does not focus on sales revenue from a business’s goods and services.
Can be used to effectively measure and compare the profitability between two companies.

Pros and Cons of Gross Profit Margin

Pros	Cons
Can help determine how much profit is generated directly from a business’s goods and services.	Does not include a business’s total overhead costs in its calculation, such as employee salaries or advertising costs.
May help identify areas of improvement in business strategy.

How Does Net Profit Margin Differ From Gross Profit Margin?

Net profit margin includes all expenses like employee salaries, debt payments, and taxes whereas gross profit ma💜rgin identifies how much revenue is directly generated from a business’s goods and services but excludes overhead costs. Net profit margin may be considered a more holistic overview of a company’s profitability.

Why Should Investors Consider a Company’s Net Profit Margin?

Investors should consider a company’s net profit margin because it’s a key indicator of a company’s 澳洲幸运5官方开奖结果体彩网:profitability and whether investing in it is a wise decision. If a bඣusiness shows increasing profits and decreased expenses over time, this may make it more worthwhile and profitable to potential investors.

How Can a Company Positively Impact Its Net Profit Margin?

A company can positively impact its net profit margin by increasing its revenue, whether tꩲhrough price increases or an increased sale volume, while simultaneously eliminating unnecessary expenses and increasing efficiencies.

However, it’s important to recognize that cutting expenses may negatively impact profits if the cuts are too dramatic. For example, if a company lays off half its staff to save on salary costs, it may🦹 be more difficult to drive company profits with fewer workers. Alternatively, if a company finds cheaper supplies for its materials, perhaps that may result in producing a lower quality product which, in turn, could decrease sales.

The Bottom Line

The net profit margin indicates a business’s profits as a percentage of total revenue. In addition to other measures, the net margin is a key indicator🐭 of a company’s profitability and can be used to determine whether a business’s strategy is working or whether changes to increase profitability are needed. For investors, a healthy and stable net profit margin is a positive sign of financial strength and operational efficiency.