Net Profit Margin Calculator
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Understanding Net Profit Margin
Net Profit Margin is a critical financial ratio used to measure the percentage of profit a company produces from its total revenue. It indicates how much of every dollar in revenue collected by a company translates into profit after all expenses, taxes, and interest have been paid.
The Net Profit Margin Formula
Where:
- Total Revenue: The total amount of money generated from sales before any deductions.
- Net Income: Revenue minus all expenses (COGS, operating costs, interest, and taxes).
Why It Matters for Your Business
A high net profit margin indicates that a company is pricing its products correctly and exercising efficient control over its costs. Conversely, a low margin may suggest a high cost structure, pricing issues, or inefficient management. It is often used by investors to compare companies within the same industry.
Calculation Example
Imagine a small retail store with the following annual figures:
- Total Revenue: $200,000
- Cost of Goods Sold (COGS): $80,000
- Operating Expenses: $40,000
- Interest & Taxes: $10,000
First, calculate the Net Income: $200,000 – ($80,000 + $40,000 + $10,000) = $70,000.
Next, calculate the margin: ($70,000 / $200,000) x 100 = 35%.
In this example, the store keeps $0.35 of every dollar earned as profit.