Accounting word of the Week: Net-Profit Margin

Today, we are looking at the net-profit margin. The net profit margin is the ratio of net profits to revenues for a company or business segment. The net-profit margin is typically expressed as a percentage on the income statement. The net-profit margin shows how much of each dollar collected by a company as revenue translates into profit.

The equation to calculate net-profit margin is:

Net Profit

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Revenue

It is important to note that net margins will vary from company to company, and certain ranges can be expected in certain industries, as similar business constraints exist in each distinct industry. Furthermore, low-profit margins don’t necessarily equate to small profits.

The net-profit margin is one of the most important indicators of a business financial health. It can give a more accurate view of how profitable business is than its cash flow. By tracking its increases and decreases in its net-profit margin, a company can assess whether or not current practices are working. The net-profit margin can be used as a planning tool as a company can forecast profit based on revenues.

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Disclaimer: This blog is for information purposes only and is not intended to provide investing, accounting, tax or legal advice and should not be relied upon