Net profit margin is a profitability ratio that measures how much net profit a company generates as a percentage of its total revenue. It shows how efficient a company is at converting sales into actual profits.
- Net profit margin = Net profit / Total revenue x 100
A higher net profit margin indicates greater efficiency and ability to turn more of every dollar earned into actual profit. For example, a company with $1M net profit on $10M total revenue would have a 10% net profit margin.
Factors like pricing strategies, production costs, operating expenses, and tax rates impact net profit margin. Over time, positive trends in net profit margin signals effective business decisions and strong financial health.
Analysts often compare a company’s net profit margin to competitors and industry averages. Large discrepancies may reveal vulnerabilities or highlight more efficient operations. Monitoring changes in net profit margin is also important for investors.