Net profit margin

Net profit margin expresses net profit as a percentage of sales revenue. It shows how much of each pound of sales revenue is converted into net profit after other operating expenses and interest have been deducted.

Net profit margin (%) = (net profit ÷ sales revenue) × 100. You must memorise this formula. A higher margin suggests the business converts sales into net profit more efficiently and controls its costs more tightly.

Worked example

Riverside Cycles has sales revenue of £250,000 and net profit of £18,000. Net profit margin = (£18,000 ÷ £250,000) × 100 = 7.2%. This means 7.2p of every £1 of sales becomes net profit.

Gross and net margins

A high gross profit margin does not guarantee a high net profit margin, because other operating expenses and interest may still be high. For example, a business with sales revenue of £600,000 and gross profit of £240,000 has a gross profit margin of 40%. If other operating expenses and interest total £180,000, net profit is £60,000, so the net profit margin is only 10%. Most of the gross profit has been used up by other operating expenses and interest.

Give a net profit margin as a percentage. If a question asks for a certain number of decimal places, round to exactly that many.