Net Profit Margin

Net profit margin is the broadest of the common profit margins. It shows how much of each dollar of revenue is left as profit after every cost has been paid, including production costs, operating expenses, interest and taxes.

The formula is net income divided by revenue, times 100.

Example: a company has revenue of $1.2 billion and net income of $96 million. Its net profit margin is 8%, so it earns 8 cents of profit for every dollar of sales.

Net margin captures everything, which is both its strength and its weakness. It shows the final result for shareholders, but it can be affected by one-time items, such as gains from selling a business, large write-downs or unusual tax effects. That is why analysts look at it together with gross and operating margins, which show where in the cost structure profit is being gained or lost.

Margins vary a lot between industries. Supermarkets often run on thin net margins, while some software and pharmaceutical companies have much higher ones. Comparing a company with its peers and with its own history is the most useful approach.

Net profit margin is one of the three components of the DuPont analysis of return on equity.