Net Profit Margin

Net Profit Margin is a ratio that compares a company's net income to its revenue. It is one of the most important indicators of a company's financial health.

Formula

Net Income / Revenue

What does it tell you?

This ratio reveals the percentage of revenue that remains as profit after all expenses, interest, and taxes have been paid. It essentially shows how much of each dollar earned by the company is translated into profits.

Interpretation

High Net Profit Margin

A high net profit margin suggests that a company is efficient at converting sales into actual profit. This is generally a sign of good financial health and operational efficiency.

Low Net Profit Margin

A low net profit margin indicates that a company uses a large portion of its revenue to pay for expenses. It might signal high costs or inefficient operations, or it could be typical for that specific industry (e.g., grocery stores).

How to Use It

Tip: Compare a company's net profit margin with its industry average and its own historical margins. Stable or increasing margins are usually a positive sign for investors.

Risks

Warning: Net profit margin can be misleading for companies with significant one-time gains or losses. Always look at operating margin as well to see the profitability from core business operations.