Net profit margin is a financial metric that measures a business’ ratio of net income to revenue, or how much net income is generated by revenue.
Net profit measures the amount of money a business earns after deducting other expenses, including the cost of goods sold (COGS), operating expenses, salaries, and taxes. Net profit margin evaluates how much of that income is generated by revenue alone. It’s expressed as a percentage because it compares the ratio of net income to revenue.
If the business’ revenue is growing, but their COGS or operating costs are rising even faster, they’ll see a dip in their net profit margin, despite earning more income. In this way, net profit margin is a great way to assess a business’ overall profitability, predict its future success, and compare it to other competitors.
To calculate their net profit margin, the business would account for all types of financial obligations, including all income streams, debt, investment income, and interest expenses — making this a fully comprehensive financial metric.