Net profit margin is a company's net income (the profit left after every cost, interest payment and tax) divided by its revenue, shown as a percentage. It answers a simple question: out of each dollar of sales, how many cents does the company actually keep? A net margin of 8% means 8 cents of profit for every dollar sold. It is the last of the three margins: gross margin looks before running costs, operating margin before interest and tax, and net margin after everything.
Worked example
Say Company A has revenue of $50 million. After the cost of goods, wages, rent and marketing, interest of $1 million and tax of $1 million, the net income is $4 million. Net profit margin = $4 million ÷ $50 million = 0.08 = 8%. Company A keeps 8 cents from each dollar of sales. Now suppose $1 million of that profit came from a one-off sale of a building. Without it, net income is $3 million and the margin is $3 million ÷ $50 million = 0.06 = 6%. The 8% overstates what the business earns in a normal year.
Why it matters
Net profit margin shows how much of each sale ends up as profit for shareholders, so it is the bottom line of the margin family. Its weakness is that it mixes everything: interest, tax and one-off items such as asset sales, lawsuits or write-downs can push a single year up or down without saying anything about the core business. Normal levels also differ hugely by industry (a grocery chain and a software firm are not comparable). Read the trend over several years, compare with similar companies, and look at operating margin next to it. A high or low figure is a question to look into, not a verdict. The revenue and net income figures are on the income statement in the annual report.
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Frequently asked questions
There is no single good level, because it depends on the industry. A grocery chain may keep a few cents per dollar while a software company keeps far more, and both can be healthy. Compare the figure with similar companies and with the same company's earlier years.
Operating margin stops before interest and income tax, so it shows the core business. Net margin is measured after interest, tax and any one-off items, so it shows what is finally left for shareholders.
Revenue and net income are both on the income statement in the company's annual report. Use the same period for both, and check whether the net income includes one-off gains or losses.
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