Net Profit Margin Calculator

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Net Profit Margin Calculator

Financial Calculators
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What is Net Profit Margin?


Profit margin is calculated with selling price (or revenue) taken as base times 100. It is the percentage of selling price that is turned into profit, whereas "profit percentage" or "markup" is the percentage of cost price that one gets as profit on top of cost price. While selling something one should know what percentage of profit one will get on a particular investment, so companies calculate profit percentage to find the ratio of profit to cost.


The profit margin is used mostly for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses' operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so that comparison of one with another can have little meaning. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss, or a negative margin.


Profit margin is an indicator of a company's pricing strategies and how well it controls costs. Differences in competitive strategy and product mix cause the profit margin to vary among different companies.

  • If an investor makes $10 revenue and it cost them $1 to earn it, when they take their cost away they are left with 90% margin. They made 900% profit on their $1 investment.
  • If an investor makes $10 revenue and it cost them $5 to earn it, when they take their cost away they are left with 50% margin. They made 100% profit on their $5 investment.
  • If an investor makes $10 revenue and it cost them $9 to earn it, when they take their cost away they are left with 10% margin. They made 11.11% profit on their $9 investment
  • Suppose that something is bought for $50 and sold for $100.
  • Cost price = $50
  • Selling price (revenue) = $100
  • Profit = $100 − $50 = $50
  • Profit percentage = $50/$50 = 100%
  • Profit margin = ($100 - $50)/$100 = 50%
  • Return on investment multiple = $50 / $50 (profit divided by cost).


If the revenue is the same as the cost, profit percentage is 0%. The result above or below 100% can be calculated as the percentage of return on investment. In this example, the return on investment is a multiple of 1.0 of the investment, resulting in a 100% gain.


Net Profit/Income

Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings. As profit and earnings are used synonymously for income (also depending on UK and US usage), net earnings and net profit are commonly found as synonyms for net income. Often, the term income is substituted for net income, yet this is not preferred due to the possible ambiguity. Net income is informally called the bottom line because it is typically found on the last line of a company's income statement (a related term is top line, meaning revenue, which forms the first line of the account statement).


In simplistic terms, net profit is the money left over after paying all the expenses of an endeavor. In practice this can get very complex in large organizations. The bookkeeper or accountant must itemise and allocate revenues and expenses properly to the specific working scope and context in which the term is applied.


Net income is usually calculated per annum, for each fiscal year. The items deducted will typically include tax expense, financing expense (interest expense), and minority interest. Likewise, preferred stock dividends will be subtracted too, though they are not an expense. For a merchandising company, subtracted costs may be the cost of goods sold, sales discounts, and sales returns and allowances. For a product company, advertising, manufacturing, & design and development costs are included. Net income can also be calculated by adding a company's operating income to non-operating income and then subtracting off taxes.


The net profit margin percentage is a related ratio. This figure is calculated by dividing net profit by revenue or turnover, and it represents profitability, as a percentage.


An Equation for Net Income

Net profit: To calculate net profit for a venture (such as a company, division, or project), subtract all costs, including a fair share of total corporate overheads, from the gross revenues or turnover.


Net profit = sales revenue − total costs


Net profit is a measure of the fundamental profitability of the venture. "It is the revenues of the activity less the costs of the activity. The main complication is . . . when needs to be allocated" across ventures. "Almost by definition, overheads are costs that cannot be directly tied to any specific" project, product, or division. "The classic example would be the cost of headquarters staff." "Although it is theoretically possible to calculate profits for any sub-(venture), such as a product or region, often the calculations are rendered suspect by the need to allocate overhead costs." Because overhead costs generally don't come in neat packages, their allocation across ventures is not an exact science.


Example

Net profit on a P & L (profit and loss) account:

  • Sales revenue = price (of product) × quantity sold
  • Gross profit = sales revenue − cost of sales and other direct costs
  • Operating profit = gross profit − overheads and other indirect costs
  • EBIT (earnings before interest and taxes) = operating profit + non-operating income
  • Pretax profit (EBT, earnings before taxes) = operating profit − one off items and redundancy payments, staff restructuring − interest payable
  • Net profit = Pre-tax profit − tax
  • Retained earnings = Net profit − dividends


Another equation to calculate net income:

Net sales (revenue) - Cost of goods sold = Gross profit - SG&A expenses (combined costs of operating the company) - Research and development (R&D) = Earnings before interest, taxes, depreciation and amortization (EBITDA) - Depreciation and amortization = Earnings before interest and taxes (EBIT) - Interest expense (cost of borrowing money) = Earnings before taxes (EBT) - Tax expense = Net income (EAT)

Another equation to calculate net income:

  • Net sales = gross sales – (customer discounts + returns + allowances)
  • Gross profit = net sales – cost of goods sold
  • Gross profit percentage = [(net sales – cost of goods sold)/net sales] × 100%.
  • Operating profit = gross profit – total operating expenses
  • Net income = operating profit – taxes – interest


Other Terms

  • Net sales = gross sales – (customer discounts, returns, and allowances)
  • Gross profit = net sales – cost of goods sold
  • Operating profit = gross profit – total operating expenses
  • Net profit = operating profit – taxes – interest
  • Net profit = net sales – cost of goods sold – operating expense – taxes – interest





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