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%

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