Blog · Finance metrics and formulas
Net profit margin is net income divided by revenue, after every cost, interest and tax. This page gives the formula, works it on four quarters and a full year, proves why the year is not the average of the quarters, places it beside gross and operating margin on one P&L, and shows what counts as good by US industry.
Net profit margin is net profit, also called net income, divided by revenue. It is what is left of each sales dollar after cost of goods sold, operating expenses, interest and income tax. A company with net income of $189,000 on revenue of $2,400,000 has a net profit margin of 7.9%: about 7.9 cents of every dollar of sales stays with the owners.
Net profit margin = Net profit / Revenue × 100
Net profit is the bottom line of the income statement. In the words of the SEC's beginners' guide to financial statements, after operating expenses, interest and other items, "income tax is deducted and you arrive at the bottom line: net profit or net losses." Net margin turns that bottom line into a share of sales, so companies and periods of different size can be compared.
Two figures for the same period and the same entity:
| Input | Where it comes from |
|---|---|
| Revenue | Net revenue: sales after discounts, returns, rebates and credit memos |
| Net profit | Net income from the income statement, after interest and income tax |
If the group has subsidiaries it does not wholly own, use net income attributable to the company's shareholders. Under US GAAP the part that belongs to outside owners is shown as net income attributable to noncontrolling interests, and it is not the company's profit.
One distributor, one fiscal year, in USD. These are the same full-year figures as the profit margin calculator opens with.
| Quarter | Revenue (USD) | Net profit (USD) | Net margin |
|---|---|---|---|
| Q1 | 550,000 | 33,000 | 6.0% |
| Q2 | 600,000 | 42,000 | 7.0% |
| Q3 | 500,000 | 24,000 | 4.8% |
| Q4 | 750,000 | 90,000 | 12.0% |
| Year | 2,400,000 | 189,000 | 7.9% |
Each quarter is net profit over revenue: Q4 is 90,000 / 750,000 = 12.0%. The year is total net profit over total revenue: 189,000 / 2,400,000 = 7.875%, shown as 7.9%.
The simple average of the four quarterly margins is (6.0 + 7.0 + 4.8 + 12.0) / 4 = 7.45%. That is wrong by more than four tenths of a point, because Q4 carries the most revenue and the highest margin, and the average gives it the same weight as Q3.
The year's margin is the revenue-weighted average of the quarters. Weight each quarter's margin by its share of revenue and you get back to 7.875% exactly: 0.229 × 6.0 + 0.250 × 7.0 + 0.208 × 4.8 + 0.3125 × 12.0. Count-weighted and value-weighted explains why the unweighted mean of ratios answers a different question.
A second check: the four quarters' revenue and net profit must sum to the full-year income statement, $2,400,000 and $189,000. If they do not, a year-end adjustment has been posted to the year but not to a quarter.
The same year, line by line:
| Line | Amount (USD) | Margin |
|---|---|---|
| Revenue | 2,400,000 | |
| Cost of goods sold | 1,560,000 | |
| Gross profit | 840,000 | 35.0% |
| Operating expenses | 552,000 | |
| Operating profit | 288,000 | 12.0% |
| Interest expense | 36,000 | |
| Income before taxes | 252,000 | 10.5% |
| Income tax | 63,000 | |
| Net income | 189,000 | 7.9% |
Each margin answers a different question. Gross margin (35.0%) says whether prices cover the cost of what was sold; gross profit margin covers it in full. Operating margin (12.0%) says whether the business covers its running costs. Net margin (7.9%) says what is left for the owners once lenders and tax authorities are paid. The 4.1-point gap between operating and net margin here is interest (1.5 points) and tax (2.6 points).
It depends on the industry, because the industry sets the cost structure. Aswath Damodaran's margins by industry, using US company data as of January 2026, give these net margins:
| Industry (US) | Net margin |
|---|---|
| Food wholesalers | 1.17% |
| Food processing | 2.82% |
| Retail (distributors) | 6.05% |
| Business and consumer services | 7.03% |
| Machinery | 10.58% |
| Software (system and application) | 25.49% |
| Total market | 9.74% |
On those figures the 7.9% distributor above is ahead of its industry average. Use a peer figure to check you are in the right range, then compare against your own history: a two-point fall in your own margin is a finding, a two-point gap to an average usually is not. How to judge a sales benchmark applies to any outside figure.
Revenue in column B, net profit in column C, quarters in rows 2 to 5. Per quarter, in D2 and filled down:
=C2/B2
For the full year:
=SUM(C2:C5)/SUM(B2:B5)
Format both as percentages. Never use =AVERAGE(D2:D5) for the year; it returns 7.45% where the answer is 7.9%.
A company net margin is one number over many customers, some of which earn far more than others once discounts and cost to serve are counted. Gross margin vs contribution margin vs net margin shows how to take margin down to each customer without misleading overhead allocations. Covirage's tools compute margins from your ledger export by period, entity and customer, dividing totals rather than averaging ratios, and reconcile them to the P&L; the external AI model explains the movements it is given and never does the arithmetic. See customer profitability, and margin by account for the commercial view. For the margin before interest and tax, see operating margin, and for the two profit figures side by side, see gross profit vs net profit.
Gross profit margin takes off only the cost of goods sold, so it measures product pricing and buying. Net profit margin takes off every cost, interest and tax, so it measures what the business keeps. The gap between them is overhead, financing and tax.
It depends on the industry: distributors and retailers often run in low single digits, software and professional services much higher. Compare against a dated sector dataset and against your own trend rather than a single rule of thumb.
Yes. When costs, interest and tax exceed revenue the company makes a loss and the margin is negative. Early-stage and restructuring companies often report negative net margins for several years.
Not always. Return on sales is often defined on operating profit rather than net profit. Check the definition in use; net margin is after interest and tax, operating margin is before them.