Net Profit Ratio Formula & Example

Definition: Net Profit Ratio (also known as Net profit margin/percentage) is the ratio of net profit to net sales expressed as a percentage.

Formula:
Net Profit Ratio = (Net profit / Net sales) * 100%

Example 1:
Vincent Ltd. has a total sales of $300,000, Returns inwards $20,000, Cost of goods sold $70,000, and Operating expenses $50,000. Calculate NP ratio.

Solution:
Net sales = 300,000 - 20,000 = $280,000
Gross profit = 280,000 - 70,000 = $210,000
Net profit = 210,000 - 50,000 = $160,000

NP Ratio = (160,000 / 280,000) * 100% = 57.14% (correct to 2 decimal places)

Example 2:
Calculate the NP percentage, given the following figures:
Total Expenses $72,000
Stock at start of year $51,000
Stock at end of year $31,000
Purchases returns $6,500
Sales returns $62,000
Total sales $400,000
Total purchases $32,500

Solution:
Net purchases = Total Purchases - Purchases returns = 32,500 - 6,500 = $26,000
Cost of Sales = Stock at start + Net purchases - Stock at end = 51,000 + 26,000 - 31,000 = $46,000
Net sales = Total sales - Sales returns = 400,000 - 62,000 = $338,000
Net Profit = Net sales - Cost of sales - Total expenses =  338,000 - 46,000 - 72,000 = $220,000

NP percentage = (NP / Net sales) * 100% = 220,000 / 338,000 * 100% = 65.09%

* Next: Debt to Equity Ratio Formula & Example

Author

Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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