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Net Profit Margin

Definition:

Net profit margin (also called net margin or net profit margin percentage) reflects the overall profitability of the company. Net margin tells a company how much out of every sales dollar it gets to keep after everything else has been paid for including people, vendors, lenders, the government, and so on.

Net profit margin is calculated by dividing net profit by revenue:

Net Profit Margin Formula

For example, if a company’s net profit was $480 and its revenue was $16,000, then the net profit margin is 3% (480 / 16,000).

Net Profit Margin Example

Book Excerpt:

(Excerpts from Financial Intelligence, Chapter 21 – Profitability Ratios)

Net profit is the proverbial bottom line, so net margin is a bottom-line ratio. But it’s highly variable from one industry to another. Net margin is low in most kinds of retailing, for example. In some kinds of manufacturing it can be relatively high. The best point of comparison is a company’s performance in previous time periods and its performance relative to similar companies in the same industry.

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