Formula For Net Profit Margin

Formula For Net Profit Margin

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The formula for net profit margin is the ratio of net profit or net income to total revenue or net sales. The ratio is always expressed in percentage form. Net profit can be calculated by subtracting COGS, operating and other expenses, interest, and taxes from the revenue or sales. A higher net profit margin indicates a good company sign.

Formula For Net Profit Margin

What Is The Net Profit Margin –

Net Profit Margin also known as Profit Margin or Net Profit Margin Ratio is a financial ratio that measures the percentage of earnings or profits remaining after all operating and non-operating expenses have been deducted from the revenue or sales generated. Net profit margin is typically expressed as a percentage but can also be represented in decimal form. It measures the amount of net profit a company obtains per dollar or rupee of revenue generated by a company.

Net profit margin helps business owners determine the pricing strategy and manage company costs. This ratio is a measure to understand the financial stability of a company. The ratio varies from industry to industry. This profitability ratio shows what percentage of every dollar/rupee of sales becomes profit.

How To Find Net Profit Margin Ratio –

In simple words, the net profit margin is the ratio of net profit to sales or revenue. Net profit can be calculated by subtracting all costs or expenses from sales or revenue. Then divide net profit by sales or revenue and multiply it by 100, then we will get the net profit margin ratio.

Formula For Net Profit Margin –

Formula For Net Profit Margin is given as

Net Profit Margin = Net Profit / Net Sales

Net Profit = Net Sales – ( COGS + Expenses + Interest + Taxes )

Net Profit Margin Example –

ParticularsCompany ABCCompany XYZ
Sales100100
COGS5070
Operating Expenses1510
Interest05
Tax (25%)8.753.75
Net Profit26.2511.25
Net Profit Margin26.25%11.25%

Calculation For Net Profit Margin –

Let’s talk about company ABC,

Sales of company ABC = 100

COGS of company ABC = 50

Operating Expenses of company ABC = 15

Interest paid by company ABC = 0 ( Company has no debt )

Tax paid by company ABC (25%) = 8.75

Now let’s calculate Net Profit of company ABC,

Net Profit = Net Sales – ( COGS + Operating Expenses + Interest + Tax )

Net Profit = 100 – ( 50 + 15 + 0 + 8.75 )

Net Profit = 100 – 73.75

Net Profit Of Company ABC = 26.25

Now, we can calculate Net Profit Margin,

Net Profit Margin = Net Profit / Net Sales

Net Profit Margin = 26.25 / 100

Net Profit Margin Of Company ABC = 26.25 %

Now, let’s talk about company XYZ,

Sales of company XYZ = 100

COGS of company XYZ = 70

Operating Expenses of company XYZ = 10

Interest paid by company XYZ = 5

Tax paid by company XYZ (25%) = 3.75

Now let’s calculate the Net Profit of company XYZ,

Net Profit = Net Sales – ( COGS + Operating Expenses + Interest + Tax )

Net Profit = 100 – ( 70 + 10 + 5 + 3.75 )

Net Profit = 100 – 88.75

Net Profit Of Company XYZ = 11.25

Now, we can calculate Net Profit Margin,

Net Profit Margin = Net Profit / Net Sales

Net Profit Margin = 11.25 / 100

Net Profit Margin Of Company XYZ = 11.25 %

Why Is The Net Profit Margin Important –

  1. It is used to measure profitability.
  2. It is used to evaluate the risk.
  3. A higher net profit margin indicates excellent, and effective management.
  4. A lower net profit margin indicates inefficient management.
  5. A higher ratio indicates that the company has an effective pricing strategy.
  6. This ratio helps compare companies within the same industry.

How To Improve Net Profit Margin –

  1. By increasing sales volume.
  2. By reducing expenses.
  3. By reducing debt.

Also, Check Gross Profit Margin

To check the financials of company Visit – Yahoo Finance

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