Net profit margin = Net income ÷ Sales revenue
Net profit margin formula helps financial analysts tounderstand the net income amount of an organization’s revenue. The net profit marginis commonly recognized in % terms and can be found in the financial statementsof a company. To calculate the Profit Margin the variables in the equation canbe taken from the 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 to the growth of an organization, with a continuous and steady increase in profits. This does not consider the expenses related to the progress of an organization. As an organization moves 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 anorganization rises. Indeed, even efforts to cover additional costs by rising sellingprice may result in a decline in sales as buyers may not be ready to buy theitem at a higher rate. If this somehow managed to happen, overall revenue couldfall regardless of the higher selling price.
In a few circumstances, the inverse may occur as the productioncost could go down with an increase in production scale.
In spite of the fact that these issues are principallyidentified with other economic and financial ideas, it is really essential foran organization to apply this equation to screen its net profit margin withchanging policies, production, and other things.
Net Profit margin formula illustration
The income statement of Tim & Brooks shows a net income of $800,000 for the 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.