How to Calculate Net Profit Margin

The net profit margin (also called net profit percentage) can be calculated by dividing net profit after interests and taxes by sales revenue. The ratio is expressed in percentage terms:

Net Profit Margin = (Net profit before interest and taxation / Sales) * 100%

Learn how to calculate Net Profit Margin with the following example:

NBA plc has the following information for the year ended 31 December 2010:
Sales: $500,000
Cost of sales: $200,000
Rates: $3,000
Salaries: $20,000
Insurance: $5,000
Heat and light: $4,500
Postage and telephone: $500
Depreciation of Fixtures and fittings: $2,000
Interest payable: $1,500

Required: Calculate the net profit percentage for NBA plc.

Solution:
Gross profit = 500,000 - 200,000 = $300,000
Total expenses (exclude interest payable) = 3,000 + 20,000 + 5,000 + 4,500 + 500 + 2,000 = $35,000
Net profit before interest and taxation = Gross profit - Total expenses = 300,000 - 35,000 = $265,000
Net Profit Margin = (265,000 / 500,000) * 100% = 53%

* Next: Return on Capital Employed Calculation
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