Net profit margin
Learn what net profit margin is, how to calculate it, and what counts as a good margin for your business.
Published Monday 31 August 2026
Table of contents
Net profit margin is the portion of income you get to keep
Key takeaways
- Net profit margin shows the percentage of revenue you keep as profit after every expense, including tax and interest.
- The formula is net profit divided by revenue, multiplied by 100.
- A higher margin means you keep more of each peso you earn, though a healthy margin varies by industry.
- Tracking your margin over time helps you spot pricing and cost issues early.
What is net profit margin?
Net profit margin is the percentage of revenue you keep as profit once all expenses are paid, including taxes and interest. It tells you how much of every peso earned turns into profit.
The key difference to remember is that net profit margin is a percentage, whereas net profit is a peso amount. To run the numbers for your own business, you can try the net profit margin calculator.
Net profit margin formula
The formula turns two figures from your income statement into a single percentage. You divide net profit by revenue and multiply the result by 100.
Net profit margin = (net profit ÷ revenue) × 100
The two figures in the formula are:
- Net profit: what remains after you subtract all operating expenses, interest, and taxes from revenue
- Revenue: the total money your business earns from sales before any expenses are deducted
How to calculate net profit margin
Calculating your net profit margin takes three short steps once you have your figures ready. Pull your revenue and net profit from your income statement first.
- Find your total revenue for the period you want to measure.
- Work out your net profit by subtracting all expenses, interest, and taxes from that revenue.
- Divide net profit by revenue, then multiply by 100 to get your margin as a percentage.
Say your business earns ₱1,000,000 in revenue and keeps ₱200,000 as net profit. Your net profit margin is (₱200,000 ÷ ₱1,000,000) × 100, which comes to 20%.
Net profit margin vs gross profit margin
Both ratios measure profitability, but they draw the line at different points in your costs. The gap between them shows how much your operating expenses and taxes eat into what you earn.
Your gross profit is revenue minus the cost of goods sold, so gross profit margin reflects the profitability of your products alone. Net profit is gross profit minus all other operating expenses and taxes, so net profit margin reflects the profitability of the whole business.
What is a good net profit margin?
A good net profit margin is one that is healthy for your industry and improves or holds steady over time. There is no single figure that fits every business.
As a general rule of thumb, the Corporate Finance Institute treats a 10% net profit margin as average, 20% as high or good, and 5% as low. This varies by industry, as capital-intensive and high-competition sectors often run on leaner margins.
How to interpret your net profit margin
Your margin is a quick read on how efficiently your business turns sales into profit. A high margin signals strong pricing and cost control, while a low margin suggests expenses are absorbing most of your revenue.
A 20% margin means you keep 20 centavos of profit from every peso of revenue after all costs are covered. Read the number with some care, though, because debt and interest, depreciation, and one-off items can all skew a single period, and margins are not comparable across different industries.
How to improve your net profit margin
Improving your margin comes down to earning more from each sale or spending less to make it. Small, steady adjustments across the business tend to add up faster than one large change.
- Review your pricing to make sure it reflects the value you deliver and covers rising costs
- Control costs by renegotiating with suppliers and trimming spending that adds little value
- Improve efficiency by reducing waste and automating repetitive admin tasks
- Focus on your most profitable products and customers to lift your average return
Track your net profit margin with Xero
Xero brings your revenue and expenses into clear reports, so you can see your net profit margin update as you work rather than waiting for month-end. Start today and get one month free to track your margins with confidence.
FAQs on net profit margin
Here are quick answers to common questions about net profit margin for small business owners.
What is a good net profit margin?
A good net profit margin is one that beats your industry benchmark and trends upward over time. Comparing your figure against similar businesses matters more than chasing a fixed number.
What does a 20% net profit margin mean?
It means you keep 20 centavos as profit from every peso of revenue after all expenses. The other 80 centavos covers your costs, interest, and taxes.
What is the difference between net profit margin and gross profit margin?
Gross profit margin measures profit after the cost of goods sold only, while net profit margin measures profit after all expenses and taxes. Net profit margin gives the fuller picture of overall profitability.
How can I improve my net profit margin?
Raise prices where the market allows, cut costs that add little value, and make your operations more efficient. Reviewing your margin each month helps you act before small issues grow.
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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.