Net Profit Margin Formula

Net Profit Margin Formula (Table of Contents)

• Net Profit Margin Formula
• Net Profit Margin Calculator
• Net Profit Margin Formula in Excel (With Excel Template)

Net Profit Margin Formula

OR

Net profit margin is derived from the Profit & Loss Account of a company or a firm where the overall income and expenditure of the company gets recorded under different heads. Net profit margin refers to the percentage of total revenue remains after all company expenses which include operating expenses, interest & taxes & preferred stock dividends from its total revenue.

Or,

Profit margin is an accounting calculation that measures the financial health of a business. It is one of the closely analyzed financial formulas. Net Profit margin is a profitability ratio that measures the amount of net income earned with total revenue generated within a specific period of time (Quarterly, half-Yearly or yearly).

Example of Net Profit Margin Formula

Let’s understand the calculation of net profit margin by an example.

We have considered a profit & loss account of XYZ Company for FY2018 to calculate the net profit margins:

On the basis of the above financial figures, we can calculate the net profit margin for FY2018 by using the formula:

Total Revenue = INR 500

Net Profit = INR 30

Calculation of net profit margins by using a formula:

• Net Profit Margin = (Net Profit ⁄ Total revenue) x 100
• Net Profit Margin = (INR 30/INR 500) x 100
• Net Profit Margin= 6.00%

The company has earned 6.00% of net profit margins against its total revenues in the financial year 2018.

Explanation

Net profit margin is an important profitability ratio which measures the profit of the company over total sales for a particular period and it is stated in percentage (%). A higher net profit margin means that a company is more efficient in converting sales into actual profit and vice-versa. Net profit margins can be positive in the case of net profit or negative, in the case of net losses.

Calculating the net profit margin needs to have some important details from the company’s income statement (Profit & Loss Account):

• Net Sales or Total Revenue: Net sales are sales revenue which excludes sales returns, excise duty paid and allowances, etc. In another hand, net sales are the revenue occurred from the normal course of businesses or sales of goods and services for a particular period of time.
• Total Expenses: Total expenses of a company refer to the total expenses incurred in running the business for a particular period of time. It includes purchases of raw materials, commissions/discounts, fixed expenses (rent, insurance, license fees, utilities, etc) and variable expenses (advertising, delivery charges, electricity, etc) along with tax and interest expenses for the company.
• Net Income:

Net income (profit) = Gross income or Total Revenue – Total expenses.

In many instances, Gross income is the same as total revenue. However, It can differ with certain exclusions; for instance, stock options granted to company executives. For this example, we consider that gross income and sales revenue are the same. To arrive at net income for a specific period, like a quarter, a half year or a year, we subtract from total income/revenue with all business expenses for the same period. These include all operating costs, interest, tax payments and preferred stock dividends if any. The remaining profit is called net income for the period.

Significance and Use of Net Profit Margin Formula

• Net Profit margins are used by internal management to set future decision making about a source of revenue and uses of funds.
• Generally, a reduction in net profit margin would suggest a lot of problems for the companies in expense management or lackluster sales.
• Investors would want to know whether the company is making enough money to distribute dividends. One of the indicators they will look at is the company’s profit margin
• The net profit margins reflect the percentage of the total profit made by a company which increases the net worth of the company by retaining it in the businesses.
• This ratio tells about the company position in the industry. Always, higher net profit margin businesses continue for a longer period of time and lead the industry.
• It helps the management to declare the dividend, product pricing, market expansion, etc, on the basis of net profit margins.
• Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors.
• Net profit margins are also useful for the lenders or analyst to know the creditworthiness of a company by calculating debt or interest servicing capability.

Net Profit Margin Calculator

You can use the following Net Profit Margin Calculator

Net Profit Margin Formula in Excel (With Excel Template)

Here we will do the same example of the Net Profit Margin formula in Excel. It is very easy and simple. You need to provide the two inputs i.e Net Profit and Total Revenue

You can easily calculate the Net Profit Margin using Formula in the template provided

Net Profit Margin for FY2018 is Calculated Using Formula

Net Profit Margin for FY2017 is Calculated Using Formula

Recommended Articles

This has been a guide to a Net Profit Margin formula. Here we discuss its uses along with practical examples. We also provide you with Net Profit Margin Calculator with downloadable excel template. You may also look at the following articles to learn more –

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2. Gross Profit Margin Formula Calculation
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4. Continuous Compounding Formula