Reviewed by Oct 05, 2020| Updated on
The net profit margin is defined as the profit or net income obtained as a percentage of the revenue generated. It is obtained by dividing profits by revenues of a business or company. The net profit margin is generally represented as a percentage, and it may also be expressed in the decimal format. The net profit margin shows how much of the money recorded in the form of revenues is translating to profits.
The net income is sometimes referred to as the bottom line of an organisation or the net profit. Net margin is the other name of the net profit margin. Net profits and net income recorded in the income statements can be used interchangeably as they point to the same thing.
The financial health of a business entity is mostly measured through the net profit margin recorded. The revenues and profits of the business can be forecasted or estimated by analysing the movements (decrease and increase) of the net profit margin.
As companies represent their net profit margin in the form of a percentage instead of the amount, it makes it easier to compare and analyse the profitability of multiple companies irrespective of their size.
Investors and analysts are enabled to assess if the management of a company is able to generate substantial profits through sales and if the cost of operations and overhead costs are optimised in the best interest of stakeholders.
For instance, an organisation might have a booming revenue forecast, but its net profit margin may still shrink due to the cost involved in the operations. In ideal terms, the investors would like to see a record of margins being expanded, which is indicative of the net profit margin rising over time.