Glossary · UK
What is Net Profit Margin?
The percentage of revenue left as profit after every business cost, including interest and tax, has been deducted — a key measure of overall profitability used to compare businesses of different sizes.
Full Definition
Net profit margin expresses a business's net profit (sometimes called profit after tax, or the bottom line) as a percentage of its total revenue, calculated as net profit divided by revenue, multiplied by 100. Because it accounts for every cost the business incurs -- cost of goods sold, overheads, interest on borrowing, and Corporation Tax or Income Tax on profits -- it is a broader and generally lower figure than gross profit margin (which only deducts the direct cost of goods sold) or operating profit margin (which deducts operating costs but not interest and tax). Comparing net profit margin across companies of different sizes, or across years for the same business, shows how efficiently revenue is being converted into profit that ultimately belongs to the owners or shareholders, and is one of the headline figures used in business valuations, loan applications and management accounts. Typical healthy margins vary enormously by sector -- a supermarket might run on a net margin of a few percent given high volume and thin pricing, while a software or professional services business might expect a net margin in the double digits -- so net profit margin is most meaningful when benchmarked against similar businesses in the same industry rather than judged against an arbitrary universal target.