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PROFITABILITY RATIOS:
NET PROFIT MARGIN RATIO

Introduction

The net profit margin calculation is very similar to gross profit margin, the only difference is that you use net profit instead of gross profit. The net profit margin compares the net profit figure with sales. The net profit margin shows what percentage of the sales (or turnover) is net profit. Use the following method to work out the net profit margin:

Net Profit                     Net Profit
Margin             =          _________      x 100%

                                    Turnover

Calculation Example

Let’s use the previous example – My turnover is £10000 and my gross profit is £6000. When I subtracted expenses that were not related to sales and added non sales income (to my gross profit), I was left with £4000 net profit. To work out net profit margin I would use the following calculation:

Net Profit                     £4000
_________      =          _____              x 100   = 40% Net Profit Margin

Turnover                     £10000

If I compare gross profit margin and net profit margin I can see what (income or expenses) is affecting my profit. In my example gross profit margin is 60% and net profit margin is 40%. This means that income and expenses that are not directly related to sales has reduced my profit margin by 20 percent.  As a business it is worth looking at net and gross profit margin to make sure that overheads (non cost of sale expenses) aren’t reducing profit margins more than you would like

my turnover is £10000 and my gross profit is £6000, I would use the following calculation to work out my gross profit margin

Gross Profit                 £6000
_________      =          _____              x 100   = 60%

Turnover                     £10000

This means that my gross profit margin is 60%, or to put it another way 60 percent of my money from sales is gross profit. This sounds like a good profit but always remember that gross profit does not take all of your costs into account. If I have other expenses this will reduce the amount of profit I have made.

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