What Is Net Profit Margin?
Formula, how to read it, and a worked example.
Home › Accounting Glossary › Net Profit Margin
| Based on | Net profit |
|---|---|
| Related | Gross profit margin |
| Topic | Financial accounting · Profitability ratios |
Net profit margin in plain English
It answers: “Out of every 100 of sales, how much do we actually keep?” It is a stricter measure than gross profit margin because it takes off all the costs of running the business, not just the cost of the goods.
Worked example
Revenue is 100,000 and net profit is 10,000.
Net profit margin = 10,000 ÷ 100,000 × 100 = 10%. The business keeps 10 of every 100 of sales as profit.
| Company A | Company B | |
|---|---|---|
| Revenue | 100,000 | 400,000 |
| Net profit | 10,000 | 20,000 |
| Net profit margin | 10% | 5% |
Company B earns more profit in total but keeps less of each sale.
- Using gross profit instead of net profit in the formula.
- Comparing margins across industries with very different cost structures.
Frequently asked questions
What is a good net profit margin?
It varies widely by industry. Compare with similar businesses and with the same business over time.
What is the difference between gross and net profit margin?
Gross margin considers only the cost of goods sold. Net margin deducts all expenses, interest and tax.
Can net profit margin be negative?
Yes. If expenses exceed revenue, there is a loss and the margin is negative.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.