Net profit margin – Meaning & Formula
Net profit margin is calculated by dividing the amount of net profit by net sale. This is one of the important profitability ratios used to gauge the overall profitability of a firm. This ratio is often used to measure the efficiency of a management to derive profit out of its sale.
Net profit is the amount which is left after deducting all direct and indirect expenses from the amount of total sales.
Net profit = Operating profit – Interest and taxes
In case a company pays dividend to its shareholders then dividend paid to preference shareholders (not to equity shareholders) is also deducted to get the net profit.
Formula for the calculation of net profit margin:
Net profit ratio = Net profit/ Net revenue
The higher degree of this ratio shows that management is effectively generating profit while incurring lower costs.