# What is? Net Profit Margin

The operating efficiency of a company can be expressed in terms of net profit margin. Net profit margin describes the company’s ability to earn a net income from sales. In other words, the net profit margin tells you how much profit a company makes for every \$1 it generates in revenue. Net profit margins vary by industry, but, all else being equal, the higher a company’s profit margin compared to its competitors, the better.

In some cases, lower net profit margins represent a pricing strategy. Some businesses, especially retailers, may be known for their low-cost, high-volume approach. In other cases, a low net profit margin may represent a price war that is lowering profits. To evaluate the net profit margin of a company, consider the nature of the industry. A publishing company might have a 10–20 percent profit margin, while a supermarket might have a 2 percent profit margin.

The net profit margin is calculated by dividing the net income by net sales. For example, a company that has a net income of \$33,000 and net sales of \$960,000 would have a net profit margin of 3.4 percent.

Here’s another example. In 2018, a fictitious company Black Water Manufacturing sold 100,000 widgets for \$5 each, with a COGS (cost of goods sold) of \$2 each. It had \$150,000 in operating expenses and paid \$52,500 in taxes. What is the net profit margin?

First you need to find the revenue or total sales. If Black Water sold 100,000 widgets at \$5 each, it generated a total of \$500,000 in revenue. The company’s cost of goods sold was \$2 per widget; 100,000 widgets at \$2 each equals \$200,000 in costs. Thus you get a gross profit of \$300,000 (\$500k revenue – \$200k COGS). Subtracting \$150,000 in operating expenses from the \$300,000 gross profit leaves you with \$150,000 income before taxes.

Subtract the tax bill of \$52,500, and you’re left with a net profit of \$97,500.

Plug this information into the formula:

Net Profit Margin = Net Profit ÷ Revenue

= \$97,500 ÷ \$500,000

= 0.195 (or 19.5%)

Keep in mind that when you perform this calculation on an actual income statement, you will already have all of the variables calculated for you; your only job is to plug them into the formula.