Net Profit Margin (NPM)

Date created: Dec 16, 2020  •   Last updated: Feb 17, 2021

What is Net Profit Margin?

Net Profit Margin shows net profit as a percentage of total revenue. It gives the net profit earned for every dollar of revenue generated and is a good indicator of profitability and operating expense management.

Alternate names: Net Margin

Formula

ƒ Sum(Net Profit) / Sum(Revenue)

How to calculate

In one year, a company generates $100,000 revenue and $10,000 net profit. The net profit margin in this scenario is 10%.

Net Profit Margin

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More about this metric

Revenue measures the income generated by a business, but it does not calculate how much profit is left over after deducting operating expenses, taxes, and other costs of running a business. Net profit gives a better picture of how much profit is retained after subtracting operating expenses from revenue. The percentage of profit retained from revenue is known as the Net Profit Margin.

Low Net Profit Margin is not necessarily negative or a reason not to invest in a company, especially when that company is generating high revenue. However, it is possible for low Net Margin to indicate hidden problems such as excessive expenses and poor management practices. It is essentially profit available to pay debts and distribute to shareholders, or retain as working capital.

There are multiple financial ratios, including gross margin and EBITDA margin, and each of these numbers have vastly different meanings and values. Net Profit Margin, also known as Net Margin, provides the most complete picture because it includes all expenses in the calculation, whereas other ratios focus on select expenses and are used for specific purposes.

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