Net Profit Margin

By definition, this is the percent amount left over from revenue when a company has paid all the operating expenses, interest, and taxes. In other words, this is the final number that tells a company what percent of every dollar that they actually held on to after everyone has been paid.

What is the difference between this and gross profit margin? Gross margin is the difference between revenues and the cost of goods sold, which leaves a residual margin that is used to pay for selling and administrative expenses. Net margin is the residual earnings left after all expenses have been deducted from revenues.

The Formula:
Net profit margin = (Net profits ÷ Revenue) x 100

And to be more specific: (Total Revenue – Total Expenses)/Total Revenue = Net Profit this is then divided by Total Revenue which gives us the Net Profit Margin

Why is this important? This essentially shows how well a company can turn revenue into profits. It can also help to shed light on things like poor expense management, low sales, bad customer experience, etc. Regardless, this number is a signifier that either things are going well or maybe not so well.

What to remember: As I've stated several times recently, numbers don't tell the whole story, but they are a powerful tool that can help shed light on both the good and the bad within a company. Know your numbers.