Net profit margin
Learn what net profit margin is, how to calculate it, and what counts as a healthy margin for your business.
Published Thursday 23 July 2026
Table of contents
Net profit margin is the portion of income you get to keep
Key takeaways
- Net profit margin shows how much of your revenue is left as profit after every expense is paid.
- You calculate it by dividing net profit by revenue, then multiplying by 100 to get a percentage.
- Around 10% is often seen as a healthy margin, though a good result depends on your industry, size, and stage.
- Tracking your margin over time helps you spot trends, compare against peers, and make confident decisions.
What is net profit margin?
Net profit margin is the percentage of your revenue that remains as profit once you’ve paid every expense. It tells you how much of each sales dollar your business actually keeps.
The formula is: net profit margin = (net profit / revenue) x 100.
Net profit margin is always expressed as a percentage, whereas net profit is a dollar amount: the revenue left after subtracting all expenses, including cost of goods sold (COGS), operating expenses, interest, and taxes.
How to calculate net profit margin
Working out your net profit margin takes 2 figures from your income statement: net profit and revenue. Once you have them, the calculation is quick.
- Find your net profit: revenue minus all expenses, including COGS, operating costs, interest, and taxes.
- Divide your net profit by your total revenue.
- Multiply the result by 100 to turn it into a percentage.
Say your business earns $100,000 in revenue and, after all expenses, keeps $20,000 in net profit. Dividing $20,000 by $100,000 gives 0.2, and multiplying by 100 gives a net profit margin of 20%. To skip the manual work, you can run the numbers through a net profit margin calculator.
Gross profit margin vs operating profit margin vs net profit margin
Net profit margin is one of 3 profitability margins businesses track, and each strips out a different set of costs. Comparing them shows where your money goes as you move from sales to final profit.
- Gross profit margin: gross profit divided by revenue, where gross profit is revenue minus cost of goods sold
- Operating profit margin: operating profit divided by revenue, where operating profit is gross profit minus operating expenses, before interest and taxes
- Net profit margin: net profit divided by revenue, where net profit is what’s left after all expenses, including interest and taxes
For a broader look at how these measures fit together, see our guide on what profit margin is.
What is a good net profit margin?
There’s no single ‘good’ number, but a common rule of thumb treats around 5% as low, 10% as healthy, and 20% as high. Use these as a rough guide rather than fixed targets.
What counts as strong really depends on your industry, business size, and how mature your business is. A grocery store runs on thin margins by nature, while a software business might expect much higher ones, so compare yourself against similar businesses rather than a universal benchmark.
Why net profit margin matters
Your net profit margin is one of the clearest signals of how profitable and efficient your business is. On its own it’s a snapshot, but its real value comes from how you use it over time.
You can put your margin to work in a few ways:
- track it over time to see whether profitability is improving or slipping
- compare it against industry peers to gauge how you stack up
- test decisions, such as whether a price change or cost cut actually helped
How to improve your net profit margin
If your margin is thinner than you’d like, small changes across pricing, costs, and your product mix can add up. The goal is to keep more of every sales dollar.
A few practical places to start:
- reviewing your pricing to make sure it reflects your true costs and value
- reducing overheads and cutting waste in day-to-day operations
- dropping or reworking products and services that don’t earn their keep
- growing revenue from your most profitable lines
For more ideas you can act on, see our guide on how to increase profits.
Track your profit margins with Xero
Keeping an eye on your net profit margin is easier when your numbers sit in one place and stay up to date. With Xero, you can track revenue, expenses, and profitability in real time, then pull simple reports to see how your margins are trending.
See where your profit is really going and make more confident calls about pricing and costs, and get one month free.
FAQs on net profit margin
Here are answers to some frequently asked questions about net profit margin.
What’s the difference between net profit and net profit margin?
Net profit is a dollar figure: the money left after you subtract all expenses from revenue. Net profit margin turns that figure into a percentage of revenue, so you can compare profitability regardless of business size.
What’s a good net profit margin?
Many businesses aim for around 10%, but there’s no universal target. Because margins vary so much by sector, comparing against businesses like yours is more useful than chasing a fixed number.
What’s the difference between gross profit margin and net profit margin?
Gross profit margin only accounts for the cost of goods sold, so it measures production efficiency. Net profit margin accounts for every expense, including operating costs, interest, and taxes, so it gives you the fuller picture.
How do you calculate net profit margin?
Divide your net profit by your total revenue, then multiply by 100. For example, $15,000 of net profit on $150,000 of revenue works out to a 10% margin.
Related terms
Learn more about net profit margin
Handy resources
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Margin calculator
Calculate your gross profit margin with this simple calculator to check you’re hitting your targets.
Financial reporting
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.