Net profit margin
Learn what net profit margin is, how to calculate it, and what counts as a good margin.
Published Thursday 6 August 2026
Table of contents
Net profit margin is the portion of income you get to keep
Key takeaways
- Net profit margin is the percentage of revenue you keep as profit after all expenses, interest and taxes are paid.
- You work it out by dividing net profit by revenue and multiplying by 100.
- As a rough guide, around 5% is low, 10% is healthy and 20% is high, though a good margin varies a lot by industry.
- Net profit is a dollar figure while net profit margin is a percentage, which makes it easier to compare performance over time or against other businesses.
What is net profit margin?
Net profit margin is the percentage of your revenue that is left as profit after all expenses and taxes are paid. It tells you how many cents of every dollar of sales your business actually gets to keep.
A big chunk of your revenue goes on business expenses and settling up with the tax office. The portion that remains at the end is your net profit, and expressing it as a percentage of revenue gives you your net profit margin. That profit can be reinvested in the business or distributed to the owners.
Net profit vs net profit margin
These two terms are closely related, but they measure different things. Knowing the difference helps you read your financial reports with more confidence.
- Net profit is a dollar amount: the money left after every cost is deducted from revenue.
- Net profit margin is a percentage: net profit shown as a share of revenue.
The margin is often the more useful number, because a percentage lets you compare performance from month to month, or against another business, even when the sales figures are very different.
Net profit margin formula
The formula divides your net profit by your revenue, then multiplies the result by 100 to turn it into a percentage.
Net profit margin = (net profit ÷ revenue) × 100
Net profit is your total revenue minus every cost, including cost of goods sold, operating expenses, interest and taxes. Revenue is the total sales your business brings in before any of those costs are taken out.
How to calculate net profit margin
Once you have your revenue and total costs to hand, the calculation takes three steps. Here’s a worked example for a small business with annual revenue of HK$500,000.
- Add up all your costs for the period. Say cost of goods sold, operating expenses, interest and taxes come to HK$430,000.
- Subtract total costs from revenue to find net profit: HK$500,000 − HK$430,000 = HK$70,000.
- Divide net profit by revenue and multiply by 100: (HK$70,000 ÷ HK$500,000) × 100 = 14%.
So this business keeps 14 cents of every dollar of sales as profit. To skip the maths, you can run your figures through the net profit margin calculator.
What is a good net profit margin?
There’s no single figure that counts as good for every business, because margins depend heavily on your industry. A useful starting point is a simple rule of thumb.
As a rough guide, a net profit margin around 5% is considered low, 10% is healthy and 20% is high, according to Brex. Across US publicly traded companies, average net profit margins generally sit below 10% and vary widely by sector, based on data compiled by NYU Stern, and small businesses in Hong Kong may see very different results. The most useful comparison is your own margin over time, and margins for businesses similar to yours.
Net profit margin vs gross and operating margin
Net profit margin is one of three profitability measures you will come across, and each one strips out a different set of costs. Reading them together gives you a fuller picture of where your money goes.
- Gross profit margin looks at revenue minus the cost of goods sold, before operating costs. See how to work it out in the guide to gross profit margin.
- Operating margin takes gross profit and also subtracts operating expenses, but not interest or tax.
- Net profit margin subtracts everything, including interest and taxes, so it shows the true bottom line.
A healthy gross margin can still turn into a thin net margin once overheads, interest and tax are counted, which is why it pays to track all three when you measure profitability.
How to improve your net profit margin
Improving your margin comes down to earning more from each sale or spending less to make it. A few practical levers can help.
- Review your pricing to make sure it reflects the value you deliver and covers rising costs
- Trim unnecessary overheads and negotiate better terms with suppliers
- Focus on your most profitable products, services or customers
- Reduce waste and cut the time spent on low-value admin
For more ideas on lifting your bottom line, the guide on ways to increase profits is a good place to start. Keeping an eye on the numbers with up-to-date financial reports makes it easier to spot where margins are slipping.
Track your profit margins with Xero
When your accounts are up to date, checking your net profit margin takes seconds rather than a spreadsheet session. Xero brings your income and expenses together so you can see how profitable your business really is, and you can get one month free when you start with Xero.
FAQs on net profit margin
Here are quick answers to some common questions about net profit margin.
What is a good net profit margin?
It depends on your industry, but a margin around 10% is generally seen as healthy and 20% as high. Comparing your margin to businesses like yours is more telling than any single benchmark.
What is the difference between net profit margin and gross profit margin?
Gross profit margin only subtracts the cost of goods sold from revenue, while net profit margin subtracts every cost, including operating expenses, interest and taxes. Net profit margin is the truer measure of overall profitability.
What is the difference between net profit and net profit margin?
Net profit is a dollar amount left after all costs, while net profit margin is that profit shown as a percentage of revenue. The percentage makes it easier to compare periods or businesses of different sizes.
How do you calculate net profit margin?
Divide your net profit by your revenue and multiply by 100. For example, HK$70,000 of net profit on HK$500,000 of revenue is a 14% net profit margin.
Why is net profit margin important?
It shows how efficiently your business turns sales into profit and flags whether costs are eating into your earnings. Tracking it over time helps you catch problems early and make more confident decisions.
Related terms
Learn more about net profit margin
Handy resources
Advisor directory
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Margin calculator
Calculate your gross profit margin with this simple calculator to check you’re hitting your targets.
Financial reporting
Keep track of your performance with accounting reports
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.