How to Calculate the Net Profit Margin

This video shows how to calculate and interpret a company's Net Profit Margin. The Net Profit Margin, sometimes referred to as simply the Profit Margin, is calculated as follows:
Profit Margin = Net Income / Net Sales
Thus, a company with a Net Income of $3,000 and Net Sales of $100,000 would have a Profit Margin of 0.03, which is then multiplied by 100 and expressed as a percentage to yield a Profit Margin of 3%.
If the company's Profit Margin is 3%, this means the company generates 3 cents of profit for every dollar in sales.
What is a good or bad Profit Margin depends on the industry. Grocery stores tend to have a lower Profit Margin but compensate for this with a very high sales volume (they make very little profit on each sales, but they make a very large number of sales).-
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[@MyFinancialFocus]

I typically try to find companies with at least a 20% net profit margin to invest in.

[@SilentFive562]

This might be a dumb question but are Net Sales and Total Revenue the same?

[@Edspira]

This is not a dumb question. The terms sales and revenues are often used interchangeably, however, net sales are different than gross sales. Here's a video to explain the difference: www.edspira.com/topic/gross-sales-vs-net-sales/ Thanks for watching!

[@majog7868]

Thanks for sharing your knowledge.

[@scienceblossom6197]

Thanks a lot this is amazing explanation of profit margin. I've got two questions: 1_ why can higher turn over compensate for lower profit margin? (I guess because higher turn over means more customers and thus more reliability of that business through time) 2_ I read somewhere that we have to include taxes in the calculations of the profit margin as well but it didn't say anymore how it should be done. Would you explain a bit about that too? Thanks a lot. I Liked and Subscribed to your channel. 💖

[@OneWomanHenParty]

Seems like in the news lately we’re always hearing about how grocery chains are in such fierce competition, and what tight margins they operate under.

[@Edspira]

That's true. Kroger had a Profit Margin of just 1.71% for its most recent fiscal year. Grocery stores do not make much profit for each sales dollar, but they compensate for this by having a very large volume of sales (Kroger had $115 billion in sales revenue for its most recent fiscal year).

[@ivornworrell]

Hello, good tutorial:However, a 2% profit margin seems really low to me, because the profit margin is ultimately the bottom line of a business, which goes towards things like staff-bonus, pay increases etc, so the higher the profit margin, the more financially sound a business is.My question:Why do you say that a higher turnover can compensate for a low profit margin? Thank you.

[@Edspira]

A 2% profit margin isn't completely unrealistic. For example, Wal-Mart's current profit margin is 2.35% yet it is one of the most profitable stores in the United States. Wal-Mart is successful do to it's high volume of sales, and they draw a high volume of people to their stores with their low prices.

[@ivornworrell]

Thank you for the clarity.

[@faithmartinez846]

So Net Sales is Gross Sales minus the discounts, returns and allowances but what is Net Income?

[@LinusLimMJ]

net income is the actual earnings of the company by taking the total sales revenue of a company minus the cost of goods sold, operating expenses and tax expenses

[@SuperDhollis]

How do you find the profit margin per product? On the balance and Income sheet I have to find the profit margin per product for 2 products.

[@craiggraham719]

Can the net margin go above 100%?

[@Edspira]

no