Net Profit Margin Ratio

Net Profit Margin Ratio

See Also:
Net Profit Margin Analysis
Gross Profit Margin Ratio Analysis

Net Profit Margin Ratio

Using the net profit margin ratio formula, though essential, is a fairly simple process. The difficulty is taking steps every day to keep the proper financial information to calculate this and other financial ratios. Use this formula as a net profit margin calculator:
Net profit margin = Net income ÷ Total revenue
Financial calculators exist which can simplify the process of net profit margin calculation.

Net Profit Margin Example

For example, Steve owns a sole proprietorship which provides tech support services for small businesses. His company, serveco, is succeeding and making Steve a living wage. Steve has recently earned as many customers he is willing to handle. He now wonders if he can increase company profits while maintaining all other aspects of his business. He has considered implementing an inexpensive system to access client’s computers online instead of visiting their office. Steve, though not a CPA, is a very competent man. He begins by searching Google for “net profit margin ratio calculator” and eventually finds the information he needs. Steve converts his company records to Quickbooks. His result is the calculation below.
Because companies come in all different shapes and sizes, it is natural to observe that their net profit margins would differ as well. In fact, businesses can have a profit margin of as high as 19% or as low as 5-10%. As one would expect, the companies with the higher net profit margin are the ones that are the best organized. The companies that are the best organized are the ones that are the most efficient. The ones with the least amount of profit margin are, by contrast, the companies that are the least organized and efficient. Though, it must be said though that the ratio can be good or bad for industry that a business is in. For example, a 10% net profit ratio could be good for one industry and bad for another.

Net Profit Margin Rule

As a general rule of thumb, businesses should strive to maintain a net profit margin ratio that is above the average for the industry a business is participating in. At the same time, the business should also try to maintain a trend with that ratio that is improving, at least slowly, over time. Furthermore, a company can maintain a low ratio by finding ways to reduces expenses.
To learn how to price for profit, download our Pricing for Profit Inspection Guide.
Net Profit Margin Ratio
[box]Strategic CFO Lab Member Extra
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
Net Profit Margin Ratio


IP Valuation & Monetization For The C-Suite

Intellectual Property (IP) defines and protects the sources of goods and services in the marketplace, the products and services offered for sale and the content surrounding such offerings.  Whether trademarks, patents, copyrights, or other IP, it is critical that C-Suite strategy drives and shapes the creation, valuation use and monetization of all its intellectual property.

Read More »

Financial Ratios

See also: Quick Ratio Analysis Price to Book Value Analysis Price Earnings Growth Ratio Analysis Time Interest Earned Ratio Analysis Use of Financial Ratios Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The

Read More »

Margin vs Markup

See Also: Gross Profit Margin Analysis Retail Markup Chart of Accounts (COA) Margin Percentage Calculation Markup Percentage Calculation Margin vs Markup Differences Is there a difference between margin vs markup? Absolutely. More and more in today’s environment, these two terms are being used interchangeably to mean gross margin, but that misunderstanding may be the menace

Read More »


Financial Leadership Workshop

MARCH 28TH-31ST 2022


Financial Leadership Workshop


August 7-10th, 2023

WIKI CFO® - Browse hundreds of articles
Skip to content