Financial ratios are fateful in the analysis of any company. With the help of financial ratios, we can easily compare companies. On this page, we will learn about one such important financial ratio, the net profit margin. We will know what a net profit margin a net profit margin is, how it is calculated, and how we should use it.
Let us understand what a net profit margin is. Net profit margin is a financial ratio that tells us how much net profit a company is making on its revenue, and we often show it in percentages. For example, if the net profit margin of a company is 15%, then it means that this company is making a profit of 15% on its total revenue. For example, if the revenue of the company is $100,000, then if the company is making a profit of 15% on it, the company is making a net profit of $15,000.
The formula to calculate profit margin is net profit margin = net income/revenue×100. Here, net income, or what is also called net profit, is the company’s profit for the whole year, while revenue means the total amount of products or services sold by the company in a year, we get both of these things, net income and revenue, from the company’s income statement.
For example, let us assume AB Limited is a company whose income statement is something like this. Now let us calculate the net profit margin of AB Limited. The formula for net profit margin is net profit margin = net income/revenue×100. Here, the net income of AB Limited is $ 4200000, and the total revenue is $ 250000000. Thus, the net profit margin of AB Limited will be $ 4200000 divided by $ 2500000000 × 100 = 16.80 percent. It means that AB Limited is making a net profit of 16.80 percent of its total revenue, or, in other words, AB Limited is converting 16.80 percent of its total revenue into profit. Net profit margin is generally used to compare companies within an industry.