Net profit margin = Net income ÷ Sales revenue
Net profit margin formula helps financial analysts to understand the net income amount of an organization’s revenue. The net profit margin is commonly recognized in % terms and can be found in financial statements of a company. To calculate the Profit Margin the variables in equation can be taken from income statement.
How net profit margin formula is helpful for analysts
A typical error which a financial specialist or investor may make is to correspond the growth of an organization, with a continuous and steady increase in profits. This does not consider the expenses related with the progress of an organization. As an organization move forward, the costs either fixed or variable also move up alongside, probably more than sales growth.
The net profit margin may wince, as the cost of an organization rises. Indeed, even efforts to cover additional costs by rising selling price, may result in a decline in sales as buyers may not be ready to buy the item at a higher rate. If this somehow managed to happen, overall revenue could fall regardless of the higher selling price.
In a few circumstances, the inverse may occur as the production cost could go down with an increase in production scale.
In spite of the fact that these issues are principally identified with other economic and financial ideas, it is really essential for an organization to apply this equation to screen its net profit margin with changing policies, production, and other things.
Net Profit margin formula illustration
Income statement of Tim & Brooks shows a net income of $800,000 for year 2018 with operating revenues of $18 million. By using the net profit margin formula we get the profit margin of 4.4%. This means that after tax profit will be equal to 4.4% of sales revenue.