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Net profit margin

Net profit margin is net income expressed as a percentage of revenue, showing what share of each euro of sales flows through to the bottom line after all costs, interest and tax.

ByHoang TruongUpdated

FrameworkRatio analysis

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A manufacturer earns €8 million in revenue and, after cost of goods sold, operating expenses, interest and tax, keeps €640,000 as net income. Dividing net income by revenue gives a net profit margin of 8% — the most comprehensive margin ratio, and the figure shareholders watch most closely when judging earnings quality.

Where it fits
SubjectFinancial AccountingCoreTopicRevenue, Expenses & ProfitCoreTopicFinancial Statement Analysis & RatiosCore

The formula

LaTeX
Net profit margin=Net incomeRevenue×100\text{Net profit margin} = \dfrac{\text{Net income}}{\text{Revenue}} \times 100

Variables

Net income (profit after all costs, interest and tax) ()
Revenue (total sales for the period) ()

The most comprehensive margin ratio; shows what share of each euro of sales flows to the bottom line.

Check yourself

PracticeCORE

A firm generates revenue of €4,000,000. Its cost of goods sold is €2,400,000, operating expenses are €700,000, interest expense is €200,000, and income tax is €140,000. What is the net profit margin?

Select an answer to check your understanding.