Net Profit Margin

Net Profit Margin is the percentage of revenue that remains as profit after all expenses, including cost of goods, operating expenses, interest, and taxes, have been paid. It's the final measure of profitability.

Formula

Net Profit Margin = Net Income ÷ Revenue × 100

If a company has $1 billion revenue and $100 million net income, net margin is 10%.

Example

Microsoft (MSFT) reports revenue of $200 billion and net income of $80 billion, for a net profit margin of 40%. JPMorgan Chase (JPM) reports net margin around 20-25% (banks and credit spread out profit across many basis points). Coca-Cola (KO) has net margins around 9-12% (consumer staples with thin operating margins).

How to Interpret It

• Higher net margin (> 15%): Strong profitability. The company keeps more of every revenue dollar. Common for software, luxury goods, and financial services.
• Moderate net margin (5-15%): Typical for many industries including consumer goods, healthcare, industrials.
• Lower net margin (< 5%): Common in retail, transportation, commodities, or highly competitive industries where margins are thin.
• Rising net margin: Improving profitability, often from operational efficiency or successful price increases.
• Declining net margin: Pressured profits from higher costs, competitive pricing, or increased interest/tax burden.
• Economic sensitivity: During recessions, net margins compress as revenue falls but fixed costs remain.

Limitations

• Net margin doesn't account for capital intensity. A capital-intensive business might have lower net margins but still be highly profitable due to high revenues.
• One-time items (tax changes, litigation, asset sales) distort annual net margin; use averages or adjusted figures.
• Different tax jurisdictions and debt levels affect net margins; two companies with identical operating margins can have very different net margins.
• Net margin alone doesn't indicate whether profits are sustainable or being maintained through one-time items.

Related Terms

• Operating Margin — profit from operations before interest and taxes
• Gross Margin — profit before operating expenses
• Return on Equity — profit as a percentage of shareholder equity
• Profitability Ratios — a category of ratios measuring how well a company generates profit