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.
The Net 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).