Net Profit Margin Calculator (2024)

What is the net profit margin?

Net profit margin, also known as net margin, profit margin, or net income margin, is an indicator used to identify the percentage of revenue that the company is left with after paying all expenses.

Table of Contents

• What is the net profit margin?
  • What does the net profit margin measure?
  • Why is net profit margin important?
  • What are the limitations of the net profit margin?
• Net Profit Margin Formula:
  • How is the net profit margin calculated?
    • An example of a net profit margin:
  • How do I use the net profit margin?
• What is a good net profit margin?
  • What does it mean when the net profit margin increases?
  • What does a low net profit margin mean?
  • How do you calculate the net profit margin if there is a net loss?
  • What is the difference between a net profit margin and a gross profit margin?
• FAQs
  • Is the net profit margin calculated before or after tax?
  • How long can a company survive with negative net profit margins?
  • If a company has low net profit margins, is it in danger of going out of business?
  • If a company has high net profit margins, does that mean it will always be profitable?
  • Can we compare two companies’ net profit margins directly?

What does the net profit margin measure?

Profit margin measures how good a company is at generating profits.

Why is net profit margin important?

It’s important because net profit margin can tell investors if the company is able to optimize its expenses, its profitability, and its efficiency at generating money for shareholders. By combining it all together, it’s possible to see whether the company has some form of competitive advantage or not.

What are the limitations of the net profit margin?

The main drawback of the net profit margin is that, if not properly researched, investors can easily misinterpret it because the net profit margin only gives investors a rough idea of what’s going on in the company. Since there are many factors that affect the final number of the net income margin, such as revenue, cost of goods sold, operating expenses, etc., it is necessary to make sure that the high or low net profit margin isn’t a result of a one-time event and is consistent over a period of time, ideally 10 years or more.

Net Profit Margin Formula:

Net profit margin=net income divided by revenue.

How is the net profit margin calculated?

1. The first step is to identify net income. It can be found at the bottom of the income statement.
2. The second step is to identify the total revenue of the company. It’s located at the beginning of the income statement.
3. The third step is to perform the calculation by dividing net income by revenue.

An example of a net profit margin:

As an example, we’ll use Express, Inc., a multi-brand fashion retailer, and its income statement from the annual report for the year 2022. In that year, the company made $1.864 billion in sales, and the net income accounted for $293.8 million. Therefore, the net profit margin for the year 2022 for Express, Inc. is equal to 15.76% when you divide 1.864 billion by 293.8 million and multiply by 100.

How do I use the net profit margin?

You can implement the net profit margin in your analysis, as explained below:

• First, open a stock screener and set the desired stock exchange, industry, and country in the “descriptive” tab.
• Then switch to the “fundamental” tab, find the net profit margin, and set the approximate value that you’re fine with.
• Now you can add some additional indicators in the “fundamental”tab, such as the D/E orPE ratio, to filter out potential investments.

What is a good net profit margin?

The values of net profit margin vary from industry to industry, but it is generally accepted that a net profit margin of 10% or higher is considered good.

What does it mean when the net profit margin increases?

A continuous increase in net profit margin means that a company is either generating more profit from its sales, managing its costs more effectively, or both.

It’s a positive sign for investors since the financial situation of the company becomes more stable, which can lead to higher potential returns in the future.

What does a low net profit margin mean?

A low net margin (typically 5% or lower) means that the company is suffering either from an increasing cost of goods sold, decreasing revenue, high operating expenses, or all of these. Additionally, poor management, high competition, and market changes might also affect the net profit margin negatively.

How do you calculate the net profit margin if there is a net loss?

The equation doesn’t change, so instead of net income, net loss should be divided by total revenue and then multiplied by 100. As a result, the net profit margin will just become negative.

What is the difference between a net profit margin and a gross profit margin?

The difference is that to calculate gross profit margin, gross profit is divided by revenue, which is calculated by subtracting the cost of goods sold from revenue, while to calculate net profit margin, it’s necessary to divide net income by revenue, which is calculated by subtracting all expenses from revenue.

FAQs

Is the net profit margin calculated before or after tax?

The net profit margin is calculated after tax and all other expenses using net income (net loss) for the equation.

How long can a company survive with negative net profit margins?

It’s uncertain how long a company can survive with a negative net income margin because this depends heavily on the underlying economics of the business, its financial circ*mstances, its cash reserves and assets, and business’s ability to raise money.

Investments and financing from investors, creditors, the government, or the issuance of new stocks and bonds may allow the company to cover significant portions or all of its losses for quite some time, depending on its credibility.

Plus, the company might suffer the losses on purpose if it has valuable assets or intellectual property to support its operations in order to expand business, increase market share, or focus on research and development.

Also, a negative profit margin doesn’t always mean poor business or an actual loss of money, since there are many cases when the company has net losses on the income statement but positive free cash flows on the cash flow statement due to depreciation expenses, like Aaron’s, Inc.

If a company has low net profit margins, is it in danger of going out of business?

Not necessarily. There are many businesses in different industries with low and sometimes negative net profit margins that stay in business and continue their operations. A low net income margin is sure unhealthy for investors, but it doesn’t mean financial death for the company.

If a company has high net profit margins, does that mean it will always be profitable?

If a high net profit margin was a result of a one-time event, then no. Investors are typically looking for companies with constantly high net profit margins for a period of time (at least 10 years) to make sure that the business has some form of advantage over its competitors. Plus, additional indicators are also used to make sure that there really is a competitive advantage that allows the company to keep the net profit margin high over a long period of time, which increases the chances of the company being profitable for as long as possible in the future.

Can we compare two companies’ net profit margins directly?

No, it’s meaningless to compare the net profit margins of the companies if they aren’t within the same industry because each industry has a different capital intensiveness degree and requires a different amount of resources necessary to produce sales. So the results of comparing the two companies from two different industries will surely lead to misleading net profit margin values and false conclusions.