Net Profit Margin calculator
Net profit margin is a key financial indicator used to asses the profitability of a company.
Net profit margin formula is:
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Interpretation of Net Profit Margin
Net profit margin measures how much of each dollar earned by the company is translated into profits. 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.
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Definitions and terms used in the Net Profit Margin calculator
- Net Sales: the amount of revenue generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed.
Net sales = Gross sales - Sales returns and allowances
- Cost of Goods Sold (COGS): the direct cost attributable to the production or purchasing of the goods sold by a company. It is also referred as Cost of sales.
- Gross Profit: the difference between Net Sales and its Cost of Goods Sold, before deducting overhead, payroll, taxes, interest and other operating expenses.
Gross profit = Net sales - Cost of Goods Sold
- Operating Expenses (also known as "OPEX"): the expenses incurred by a business in its normal day-to-day operations, but not directly associated with production of goods. Operating expenses include payroll, sales commissions, employee benefits and pension contributions, transportation and travel, amortization and depreciation, rent, repairs etc. These expenses are divided into selling expenses and administrative and general expenses.
- Operating Income (also known as Earnings before Interest and Taxes - EBIT): is a measure of a company's profitability that excludes interest and income tax expenses. This is the surplus generated by operations and equals gross profit less all operating expenses.
Operating Income = Gross profit - Operating Expenses
- Interest Expenses: a fee paid on borrowed assets, the price paid for the use of borrowed money.
- Income tax: the tax levied on the income of a company.
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