The net profit ratio is calculated by dividing a company's net profit by its net sales (or revenue). This result can then be expressed as a percentage.
Here's a breakdown:
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Net Profit: Represents the company's profit after deducting all operating expenses, interest, taxes, and preferred stock dividends from its gross profit.
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Net Sales (or Revenue): This is the total revenue generated by the company from its sales of goods or services, minus any sales returns, allowances, and discounts.
Therefore, the formula for calculating the net profit ratio is:
Net Profit Ratio = (Net Profit / Net Sales) x 100
The ratio, expressed as a percentage, indicates how much profit a company makes for every dollar of sales. A higher net profit ratio suggests better profitability. For example, a net profit ratio of 20% means that for every $1 of sales, the company earns $0.20 in net profit.
