Definition:

Net Profit Margin is a financial metric that indicates the percentage of revenue that remains as profit after all expenses, taxes, and costs have been deducted from total sales.

Examples

If a company has a net profit margin of 15%, it means that for every dollar of revenue, the company retains $0.15 as profit after all expenses are paid. For instance, if a company earns $100,000 in revenue and has a net profit of $15,000, its net profit margin is 15%.

Formula:

Net Profit Margin = (Net Profit / Revenue) * 100

How to use the metric:

Net Profit Margin is used to assess a company's profitability and efficiency in controlling costs. It helps investors and analysts compare profitability across companies and industries, and evaluate how well a company is converting revenue into actual profit.

Limitations:

Net Profit Margin can be influenced by non-operational factors such as tax rates and interest expenses, making it less useful for comparing companies with different capital structures or tax situations. It also doesn't account for the size of the company or industry-specific factors.

Applies to:

Net Profit Margin is applicable across most industries, particularly those where cost control and efficiency are critical, such as manufacturing, retail, and services.

Doesn't apply to:

It may be less relevant for industries with high capital expenditures or varying tax structures, such as real estate or utilities, where other metrics like EBITDA margin might provide better insights.

Summary:

Net Profit Margin is a key indicator of a company's profitability, showing how much of each dollar of revenue is converted into profit. While useful for comparing profitability across companies and industries, it has limitations due to its sensitivity to non-operational factors and may not be as applicable in industries with unique financial structures.