Definition of Net Profit Margin
- The net profit margin is a financial ratio that tells you how much profit a company makes compared to its revenue in the form of a percentage.
- For example, if a company has a net profit margin of 20%, then they make 20 cents a dollar.
- The net profit margin can only be calculated when all the expenses have been deducted from the revenues.
- A high net profit margin means that the products you are selling are at the right price and ensuring that your costs remain as low as possible.
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What is the Formula for Net Profit Margin?
- The net profit margin can be calculated by getting the net profit and then dividing it by the revenue and then multiplying it by 100, so it can be displayed in the form of a percentage.
(Net profit ÷ Revenue) x 100
- The net profit is the revenue minus all the costs a business faces.
Net Profit Margin in Practice
- Milton Cineplex is a very famous cinema which creates a revenue of $200,000 but has many different expenses.
- Expenses include $50,000 for wages & salaries, $35,000 to maintain the cinema, $50,000 for inventory, and $10,000 of miscellaneous costs. What is the net profit margin for Milton Cineplex?
- 200,000 – 50,000 -35,000 – 50,000 – 10,000 = $55,000
- 55,000 ÷ 200,000 = 0.275
- 0.275 x 100 = 27.5
- Milton Cineplex, therefore, has a net profit margin of 27.5%, meaning that for every $100 made, Milton Cineplex earns $27.5.
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