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Net profit margin (calculation)

What is Net Profit Margin?

Net profit margin is a key financial metric that measures how efficiently a business converts sales revenue into actual profit. It shows the percentage of revenue remaining after all operating costs, interest, expenses, and taxes have been deducted. Essentially, it reveals the company's profitability and financial health.

How to Calculate Net Profit Margin

Net profit margin calculation is quick, simple, and relies on figures readily found on an organization's financial statements:

Net Profit Margin (%) = (Net Profit / Total Revenue) times 100

Let's quickly break down the calculation elements:

Example to Keep It Clear:

Say a business pulled in total revenues of $120,000. After all expenses were subtracted, it ended up with a net profit of $24,000. Plugging those numbers into the formula would look like:

Net Profit Margin= (24,000/120,0000) * 100 = 20%

This means that from every dollar the business makes in revenue, it retains 20 cents in profit after all costs are paid.

Suppose you're analyzing the profitability of a small coffee shop. Last month, the shop generated a total revenue of $15,000. After deducting expenses—including supplies, rent, payroll, utilities, taxes, and other operational costs—the shop had $3,300 remaining as net profit.

Using the formula above, the calculation is simple:

Net Profit Margin= ($3,300/$15,000) *100 = 22%

This result means the coffee shop retains $0.22 of every dollar it earns in revenue, clearly demonstrating a strong performance in managing its expenses relative to income.

What does net profit margin indicate for a business?

Net profit margin indicates how effectively a business converts sales revenue into profit, showing the percentage of revenue left over after all expenses, taxes, and costs are subtracted. It helps determine a company's profitability and financial health.

How do I calculate the net profit margin?

To calculate net profit margin, divide net profit by total revenue, then multiply by 100. The formula is: Net Profit Margin (%) = (Net Profit / Total Revenue) × 100.

Can you give an example of calculating net profit margin?

If a business makes $120,000 in revenue and has a net profit of $24,000 after expenses, the net profit margin is calculated as ($24,000 ÷ $120,000) × 100 = 20%. This means the business retains 20 cents from every dollar earned in revenue after all expenses.