Executive Summary - Net Profit / Net Profit Margin

Net Margin, Net profit margin or Net Profit Ratio all refer to a measure of profitability. It is calculated using a formula and written as a percentage or a number.

Net Profit = Revenues - Cost of Goods Sold - Administration Costs

Net Profit Margin = (Net Proft after Tax / Revenues) x 100

The profit margin is mostly used for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses' operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so that comparison of one with another can have little meaning. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss.

The Profit margin is an indicator of a company's pricing policies and its ability to control costs. Differences in competitive strategy and product mix cause the profit margin to vary among different companies.