# Net Profit Margin

Net profit margin (also called profit margin) is the most basic profitability ratio that measures the percentage of net income of an entity to its net sales. It represents the proportion of sales that is left over after all relevant expenses have been adjusted.

Net profit margin is used to compare profitability of competitors in the same industry. It can also be used to determine the profitability potential of different industries. While companies in some industries are able to generate high net profit margin, other industries offer very narrow margins. It depends on the extent of competition, elasticity of demand, production differentiation, etc. of the relevant product or market.

Return on equity and return on assets are other relevant ratios that measure the relationship of net income with shareholders' equity and total assets respectively.

## Formula

 Net Profit Margin = Net Income Net Sales

Net Sales = Gross Sales − Sales Tax − Discounts − Sales Returns

## Example

Following is an extract from Yahoo Finance (obtained on December 12, 2013) related to revenue and net income for the trailing twelve months (ttm) of The Goldman Sachs Group (NYSE: GS), JPMorgan Chase & Co. (NYSE:JPM), Morgan Stanley (NYSE: MS), and the financial services industry. Calculate their net profit margins and compare with relevant gross and operating margins.

All amounts are in USD in billion.

GSJPMMS
Revenue34.6696.3331.59
Net income8.2816.983.28
Gross margin0.910.89
Operating margin0.390.390.27

Solution

GSJPMMS
Revenue34.6696.3331.59
Net income8.2816.983.28
Net profit margin23.89%17.63%10.38%

The table above shows that GS is the most profitable of the three companies. It managed to convert 23.89% of its sales into net income. JPM earned $17.63 net income per$100 of revenue. MS is the least profitable and generated 10.38% net profit margin.

Written by Obaidullah Jan, ACA, CFAhire me at