What Is Net Profit Margin? Formula and Examples

What Is Net Profit Margin?

Net profit margin, or simply net margin, measures how much net income or profit a company generates as a percentage of its revenue. It is the ratio of net profits to revenues for a company or business segment.

Net profit margin is typically expressed as a percentage but can also be represented in decimal form. The net profit margin illustrates how much of each dollar in revenue collected by a company translates into profit.

Understanding Net Profit Margin

Net profit margin is one of the most important indicators of a company’s financial health. By tracking increases and decreases in its net profit margin, a company can assess whether current practices are working and forecast profits based on revenues.

Because companies express net profit margin as a percentage rather than a dollar amount, it is possible to compare the profitability of two or more businesses regardless of size.

This metric includes all factors in a company’s operations, including:

• Total revenue
• Additional income streams
• Cost of goods sold (COGS) and other operational expenses
• Interest expense on debt obligations
• Investment income and income from secondary operations
• Corporate tax expenses
• One-time payments for unusual events such as lawsuits and restructuring

Investors can assess if a company’s management is generating enough profit from its sales and whether operating costs and overhead costs are being contained.

For example, a company can have growing revenue, but if its operating costs are increasing faster than revenue, then its net profit margin will shrink. Ideally, investors want to see a track record of expanding margins, meaning that the net profit margin is rising over time.

Most publicly traded companies report their net profit margins both quarterly during earnings releases and in their annual reports. Companies that can expand their net margins over time are generally rewarded with share price growth, as share price growth is typically highly correlated with earnings growth.

Formula and Calculation for Net Profit Margin

$\begin{aligned} \text{Net profit margin} &= \frac{R - COGS - E - I - T}{R}*100\\ &= \frac{\text{Net income}}{R}*100\\ \textbf{where:}\\ R &= \text{Revenue}\\ COGS &= \text{The cost of goods sold}\\ E &= \text{Operating and other expenses}\\ I &= \text{Interest}\\ T &= \text{Taxes} \end{aligned}$Net profit marginwhere:RCOGSEIT​=RR−COGS−E−I−T​∗100=RNet income​∗100=Revenue=The cost of goods sold=Operating and other expenses=Interest=Taxes​

1. On the income statement, subtract the cost of goods sold (COGS), operating expenses, other expenses, interest (on debt), and taxes payable.
2. Divide the result by revenue.
3. Convert the figure to a percentage by multiplying it by 100.
4. Alternatively, locate net income from the bottom line of the income statement and divide the figure by revenue. Convert the figure to a percentage by multiplying it by 100.

Net Profit Margin vs. Gross Profit Margin

Gross profit margin is the proportion of money left over from revenues after accounting for the cost of goods sold (COGS). COGS measures the cost of raw materials and expenses associated directly with creating the company’s primary product, not including overhead costs such as rent, utilities, freight, or payroll.

Gross profit margin is the gross profit divided by total revenue and is the percentage of income retained as profit after accounting for the cost of goods sold. Gross margin helps in determining how much profit is generated from production of a company’s goods because it excludes other items such as overhead from the corporate office, taxes, and interest on a debt.

Net profit margin, on the other hand, is a measure of net profit to revenue.

Net income is also called the bottom line for a company, as it appears at the end of the income statement.

Limitations of Net Profit Margin

Net profit margin can be influenced by one-off items such as the sale of an asset, which would temporarily boost profits. Net profit margin doesn’t hone in on sales or revenue growth, nor does it provide insight as to whether management is managing its production costs.

When analyzing a company, it’s best to utilize several ratios and financial metrics. Net profit margin is typically used in financial analysis along with gross profit margin and operating profit margin.

Hypothetical Example of Net Profit Margin

Imagine a company that reports the following numbers on its income statement:

• Revenue: $100,000
• Operating costs: $20,000
• COGS or cost of goods sold: $10,000
• Tax liability: $14,000
• Net profits: $56,000

Net profit margin is thus 0.56 or 56% ($56,000 ÷ $100,000) × 100. A 56% profit margin indicates the company earns 56 cents in profit for every dollar it collects.

Let’s take a look at another hypothetical example, using the made-up Jazz Music Shop’s fiscal year (FY) 2025 income statement.



Here, we can gather all of the information we need to plug into the net profit margin equation. We take the total revenue of $6,400 and deduct variable costs of $1,700 as well as fixed costs of $350 to arrive at a net income of $4,350 for the period. If Jazz Music Shop also had to pay interest and taxes, that would have been deducted from revenues as well.

The net profit margin is calculated by taking the ratio of net income to revenue. The net profit margin is calculated as follows:

• $4,350 ÷ $6,400 = 0.68 × 100 = 68%

Real-World Example of Net Profit Margin

Below is a portion of the income statement for Apple Inc. as reported for the quarter ending on March 30, 2024.

• Net sales or revenue was $90.8 billion (highlighted in blue).
• Net income was $23.6 billion for the period (highlighted in green).
• Apple’s net profit margin is calculated by dividing its net income of $23.6 billion by its total net sales of $90.8 billion. Total net sales are used as the top line for companies that have experienced customer returns of their merchandise, which are deducted from total revenue.
• Apple’s net profit margin was 26.0% or ($23.6 billion ÷ $90.8 billion × 100).

A net profit margin of 26% means that for every dollar generated by Apple in sales, the company kept $0.26 as profit.



Source: Apple Inc.

Why Is Net Profit Margin Important?

Net profit margin is perhaps the most important measure of a company’s overall profitability. It is the ratio of net profits to revenues for a company or business segment. Expressed as a percentage, the net profit margin shows how much profit is generated from every $1 in sales, after accounting for all business expenses involved in earning those revenues. Larger profit margins mean that more of every dollar in sales is kept as profit.

How Can a Company Improve Its Net Profit Margin?

The average net margin for different industries varies widely. Businesses can gain a competitive advantage and improve its net margins, in general, by increasing sales or reducing expenses (or both). Boosting sales, however, often involves spending more money, which equals greater costs.

Cutting too many costs can also lead to undesirable outcomes, including losing skilled workers, shifting to inferior materials, or other losses in quality. To reduce the cost of production without sacrificing quality, the best option for many businesses is expansion. Economies of scale refer to the idea that larger companies tend to be more profitable.

How Is Net Margin Different from Other Profit Margin Measures?

Net profit margin takes into account all costs involved in a sale, making it the most comprehensive and conservative measure of profitability. Gross margin, on the other hand, simply looks at the costs of goods sold (COGS) and ignores things such as overhead, fixed costs, interest expenses, and taxes. Operating margin further takes into account all operating costs but still excludes any nonoperating costs.

What Are Some High- and Low-Profit Margin Industries?

High profit margin sectors are typically those where competitive pressures allow companies to generate sales that are produced without having to spend much on development, marketing, overheads and production. Initially, start-up companies may make losses until they establish themselves. For example, software or gaming companies may invest initially while developing a particular software/game and cash in big later by simply selling millions of copies with very few expenses.

Operations-intensive businesses such as transportation, which may have to deal with fluctuating fuel prices, drivers’ perks and retention, and vehicle maintenance, usually have lower profit margins. Automobiles also have low profit margins, as profits and sales are limited by intense competition, uncertain consumer demand, and high operational expenses involved in developing dealership networks and logistics.

The Bottom Line

Net profit margin measures the profits of a business as a percentage of total revenue. Along with other metrics, the net margin is used to make data-based decisions about how effectively a company uses its revenue. Each industry has different profit margins, so it’s important to consider all possible factors when evaluating the net margins of different companies.