Net Profit Margin Business Definition
Quick summary: Net profit margin is a key financial metric that shows the percentage of revenue that remains as net profit after all expenses, taxes, and interest are deducted. It helps assess a company’s profitability and efficiency.
Definition
Net profit margin is calculated by dividing net profit by total revenue and multiplying by 100 to express it as a percentage. It measures how much profit a company generates for each dollar of revenue.
Formula:
Net Profit Margin (%) = (Net Profit ÷ Revenue) × 100
A higher net profit margin indicates better profitability and cost control.
Example Calculation
Example: A company earns $200,000 in revenue with a net profit of $30,000.
Net Profit Margin = (30,000 ÷ 200,000) × 100 = 15%
This means the company keeps 15% of its revenue as profit after all expenses.
Importance of Net Profit Margin
- Indicates overall profitability of a business.
- Helps compare performance across companies and industries.
- Assists investors in evaluating financial health and efficiency.
- Supports management decisions for pricing, cost control, and growth strategy.
Related Concepts
- Gross Profit Margin: Measures profitability after cost of goods sold.
- Operating Profit Margin: Measures profit after operating expenses.
- Return on Investment (ROI): Measures overall financial return.