Calculate and Understand Net Profit Margin

by

Net profit margin (NPM)is defined as the percentage of revenue left over once all expenses (this includes but is not limited to operating expenses, interest, taxes, and specific stock dividends) are deducted from a company’s total revenue. 

Companies calculate the NPM at the end of an accounting period, so monthly, quarterly, or yearly. It is also a figure found in the income statement. It is closely related to the Gross Profit Margin but varies slightly. Be careful not to confuse them.

How to Calculate NPM

The formula:

(Total Revenue – Total Expenses)/Total Revenue = Net Profit/Total Revenue = NetProfit Margin

When you divide net profit by total revenue, you see the revenue percentage that made it to your bottom line. Investors and shareholders want to know this information regularly. 

Let’s use this example to understand better how it works;

net profit margin

Using the well-known formula along with the company information above, we determine that ACME, LLC has a current net profit margin of $30,000/$100,000 = 30%

Comparing Net Profit Margin works best when done between companies in the same industry. A “good” NPM varies between sectors, but anything above 10% is favorable as a general rule. 

Why Calculate Net Profit Margin?

NPM is one of the closest monitored numbers in finance. Its purpose is to measure the overall success of a company. The higher the NPM, the better a company is running. Because of this, shareholders and investors watch this metric meticulously. A company that is good at converting revenue into profits is the kind that also has gain available for shareholders.

When a company tracks its Net Profit Margin, it can determine if its current practices are working or need tweaking. A consistently increasing NPM is the goal for any company. Increases show investors there is proper management in place, along with excellent customer service and increased sales. 

In conclusion, regularly checking NPM is a crucial step. It is vital to a companies success at making a profit and enticing investors.

Get Your 30-day Trial!

No credit card needed

Additional Articles

0 Comments
Submit a Comment

Your email address will not be published. Required fields are marked *

Pin It on Pinterest

Share This