Net Profit Ratio

What is the Net Profit Ratio?

The net profit ratio is the net income of the business expressed as a percentage of the revenue, and is a measure of the overall profitability of a business. It is calculated by dividing net income by revenue. The ratio is also called Net Margin or Net Profit Margin.

Formula for Net Profit Ratio

Net Profit Ratio = Net income / Revenue
• Net income is found in the income statement.
• Revenue is also found in the income statement. It may be called Sales or Turnover.

How do you calculate Net Profit Margin?

 Revenue 44,000 Cost of sales 17,600 Gross margin 26,400 Operating expenses 13,500 EBITDA 12,900 Depreciation 6,500 Operating income 6,400 Finance costs 2,000 Income before tax 4,400 Income tax expense 900 Net income 3,500

In the example above the net income is 3,500 and the revenue is 44,000. The net profit ratio is given by using the formula as follows:

Net profit ratio = Net income / Revenue
Net profit ratio = 3,500 / 44,000 = 7.95%.

What does the Net Profit Ratio show?

The net profit margin ratio shows what percentage of  the revenue is left after deducting all costs. The higher the net profit margin ratio the more profit the business earns on its revenue.

Useful tips for using the Net Profit Ratio

• The net profit ratio will vary from industry to industry, so it is important to make comparisons to similar businesses in your sector. If your net profit ratio is substantially different from other businesses within your sector it will need investigation to ascertain why.
• The aim is to get the net profit ratio as high as possible.
• One off items should be excluded from both revenue and net income, as the net profit margin ratio is a measure of the operating performance of the business.