Net Profit Margin

The net profit margin reflects the profitability of the company as a percentage of net sales. It is one of the performance ratios used in evaluating business. Interestingly, some consider it the most important ratio. These users of business ratios take a very simplistic approach towards business evaluation. If the net profit margin is a set percentage, then simply increasing sales will generate larger profits to distribute to shareholders. This is their thinking in a two column format.

                                      Current          25% Increase in Net Sales 
Net Sales                        $500,000                   $625,000                 
Net Profit Margin               8.00%                        8.00%
Profit in Dollars               $40,000                      $50,000

It is never this simple as this article will explain.

The ideal use of the net profit margin is as a standard to work with in maximizing profit dollars. To understand this,

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