Next video:
Loading the player...

Net margin is usually expressed as a percentage.  It is calculated by dividing net profit by total revenue, and represents how much of each dollar of revenue earned results in net profit for the business.  Therefore, if the net margin is 12%, every dollar the business earns generates 12 cents net profit.

Net margin varies by industry and business.  A business with a low net margin can still be a good investment, especially if it earns a lot of revenue.  A $1 billion business with a net margin of 5% earns more money ($5 million) than a $10 million business with a 25% net margin ($2.5 million).

Net margin is a very good indicator as to how efficiently managers operate a company.  This is because of the factors that comprise the net profit part of the net margin formula.

For instance, Beta Corp has the following income statement:

Beta Corp Income Statement



More Efficient

Gross Sales



Cost of Good Sold



Gross Margin






Operating Expenses



Net Profit



 Net Margin



Based on the numbers in the normal column, Beta Corp has a net margin of 20%.  However, if Beta Corp reduces operating expenses by $500,000 by doing things such as cutting salaries, reducing the rent expense and cutting down on travel and entertainment expenses, there will still be $5 million in revenue, but an increase in net margin from 25% to 30%. 

Related Articles
  1. Investing

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  2. Investing

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  3. Investing

    Calculating Net Interest Margin

    Net interest margin is a metric used to measure the effectiveness of a company’s investment decisions, particularly financial institutions.
  4. Managing Wealth

    What's a Good Profit Margin for a Mature Business?

    How to determine if the amount you clear dovetails with the competition.
  5. Investing

    Gross, Operating and Net Profit Margins

    A company’s income statement includes the company’s gross, operating and net profits.
  6. Investing

    Profitability Indicator Ratios

    Learn about profit margin analysis, effective tax rate, return on assets, return on equity and return on capital employed.
  7. Investing

    Is Net Income The Same As Profit?

    Net income and profit both deal with positive cash flow, but there are important differences between the two concepts.
Hot Definitions
  1. Earnings Per Share - EPS

    Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock.
  2. Trustee

    A person or firm that holds or administers property or assets for the benefit of a third party. A trustee may be appointed ...
  3. Gross Domestic Product - GDP

    GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  4. Debt/Equity Ratio

    The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity.
  5. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center