Net Profit Margin
What it is
Net profit margin (net margin) measures how much of a company’s revenue becomes profit after all costs and expenses. Expressed as a percentage, it shows how many cents of profit a company earns for each dollar of revenue.
How it works
Net profit margin is a comprehensive profitability metric because it accounts for virtually all items that affect the bottom line. Because it’s a ratio, it’s useful for comparing profitability across companies of different sizes or across time for the same company.
Items included when calculating net profit margin:
Total revenue (sales)
Cost of goods sold (COGS)
Operating and other expenses (salaries, rent, marketing, etc.)
Interest expense (debt costs)
Taxes
One-time or unusual gains/losses and investment income
Formula and calculation
Net profit margin = (Net income / Total revenue) × 100
Where:
* Net income = Revenue − COGS − Operating expenses − Interest − Taxes ± One-time items
Step-by-step:
1. Start with total revenue.
2. Subtract COGS, operating and other expenses, interest, taxes, and any one-time items to get net income.
3. Divide net income by total revenue.
4. Multiply by 100 to convert to a percentage.
Examples
Hypothetical example (Company X)
* Revenue: $150,000
COGS: $30,000
Operating costs: $30,000
Interest: $5,000
Taxes: $18,000
Net income = $150,000 − $30,000 − $30,000 − $5,000 − $18,000 = $67,000
Net profit margin = ($67,000 / $150,000) × 100 ≈ 44.7%
Real-world example (Microsoft, quarterly)
Net sales (revenue): $65.6 billion
Net income: $24.7 billion
Net profit margin = ($24.7B / $65.6B) × 100 ≈ 37.7%
Net profit margin vs. gross profit margin
- Gross profit margin measures profitability after subtracting COGS only; it reflects how efficiently a company produces goods or delivers services.
- Net profit margin includes all expenses (overhead, interest, taxes, one-time items) and therefore offers a more complete view of overall profitability.
- Use gross margin to assess production efficiency and net margin to assess overall financial performance.
Why investors care
Net profit margin indicates a company’s ability to convert revenue into profit. A stable or improving margin suggests effective cost management and scalable operations, making a company more attractive to investors. Comparisons should be made within the same industry because typical margins vary widely by sector.
How a company can improve net profit margin
- Increase revenue via price adjustments, higher sales volume, or better product mix.
- Reduce COGS through supplier negotiation or production efficiencies.
- Cut unnecessary operating expenses while avoiding cuts that damage revenue generation.
- Refinance expensive debt to lower interest costs.
- Manage taxes and one-time expenses strategically.
Limitations and cautions
- One-time gains or losses, tax changes, or accounting differences can distort margin for a period.
- Industry norms differ—high margins in software don’t translate to retail or manufacturing.
- Aggressive cost-cutting can harm long-term revenue if it reduces product quality or capacity.
Bottom line
Net profit margin is a key indicator of overall profitability and operational efficiency. It’s best used alongside other financial ratios and industry context to evaluate a company’s financial health and investment potential.
Sources
Selected company filings and financial analysis resources, including corporate reports and regulatory filings.