Net Profit Margin
The percentage of revenue that survives as profit after all costs.
Formula
Variables
Example
$70k / $500k = 14% margin
How it works
Net profit margin shows how much of each dollar of sales remains after every expense has been paid, including operating costs, interest, and taxes. It works by comparing the final profit left at the bottom of the income statement to total revenue, then converting that ratio into a percentage so businesses can compare profitability across different sizes. A higher margin means the company keeps more of its sales as profit, while a lower margin means costs are consuming more of the revenue.
When to use it
Use this formula when you want to judge a company's overall profitability from its income statement or compare profit performance between periods, products, or businesses. It is especially useful in financial analysis, budgeting, and business performance reviews.
Worked example, step by step
Net Income = $48,000 Revenue = $320,000 NPM = (Net Income / Revenue) × 100% NPM = ($48,000 / $320,000) × 100% NPM = 0.15 × 100% NPM = 15% Final answer: The net profit margin is 15%, meaning the business keeps 15 cents of profit from every $1 of sales.
Common mistakes to avoid
- Using gross profit instead of net income in the numerator
- Forgetting to multiply by 100% when converting the ratio to a percentage
- Mixing up revenue with profit and dividing by the wrong figure
Did You Know?
Grocery chains thrive on 1–3% margins through huge volume, while software firms may exceed 30%.
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More in Accounting
View allAccounting Equation
BasicThe foundation of double-entry bookkeeping: everything a business owns is financed either by debt or by owners’ capital.
Cost of Goods Sold
BasicThe direct cost of the inventory actually sold during a period.
Gross Profit
BasicWhat remains from sales after subtracting the direct cost of the goods sold, before operating expenses.
Net Income
BasicThe “bottom line” — total earnings after all expenses, interest and taxes are deducted from revenue.
Retained Earnings
BasicCumulative profit kept in the business rather than paid out to shareholders.
Current Ratio
IntermediateA liquidity measure of whether a firm can cover its short-term obligations with short-term assets.