Net profit margin
Learn what net profit margin is, how to calculate it, and what counts as healthy for South African small businesses.
Published Wednesday 12 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 your business keeps as profit after all expenses and taxes, helping you understand true profitability.
- To calculate net profit margin, divide net profit by total revenue and multiply by 100.
- A healthy net profit margin varies by industry, but margins above 10% are often considered strong by global standards.
- Tracking your net profit margin regularly helps you spot trends, adjust pricing, and make informed decisions about costs.
What is net profit margin?
Net profit margin is the percentage of revenue your business keeps as profit after subtracting all expenses and taxes. It tells you how much of every rand you earn actually stays in your pocket.
While net profit is a rand amount (for example, R20,000), net profit margin expresses that figure as a percentage of your total revenue. This makes it easier to compare performance across different periods or against other businesses, regardless of size.
Net profit margin formula
The formula for net profit margin is straightforward.
Net profit margin = (net profit ÷ total revenue) × 100
This formula is outlined by the Corporate Finance Institute. Net profit is calculated as revenue minus all expenses, including cost of goods sold, operating expenses, interest and tax, according to Wall Street Prep.
How to calculate net profit margin
Follow these steps to work out your net profit margin, or try our net profit margin calculator to do it automatically.
- Add up all your costs (cost of goods sold, operating expenses, interest and tax) and subtract them from your total revenue to get your net profit.
- Divide your net profit by your total revenue.
- Multiply the result by 100 to express it as a percentage.
Here is an example in rand. A business earns R100,000 in revenue. Its costs total R60,000 and tax is R20,000, leaving a net profit of R20,000. Net profit margin is (R20,000 ÷ R100,000) × 100 = 20%. For more on evaluating your business finances, see this guide on how to measure profitability.
What is a good net profit margin?
There is no single figure that defines a good net profit margin. It varies by industry, business size and market conditions.
A general global rule of thumb is that a net margin above 10% is often considered healthy, according to Wall Street Prep. However, local context matters. According to the Bureau of Market Research, the average after-tax profit margin across all South African businesses was about 1.3% in 2024, based on Statistics South Africa's Annual Financial Statistics. This figure is an economy-wide average across all sizes and sectors, not specific to small businesses.
Margins also vary widely by sector. For reference, NYU Stern (Damodaran) publishes margin data for US publicly traded companies, which can offer a benchmark when comparing industries. To understand other key ratios, explore this guide on profitability ratios.
Net profit margin vs gross and operating profit margin
These three margins measure profitability at different stages of your income statement.
- Gross profit margin: revenue minus cost of goods sold, divided by revenue. It shows profitability before operating expenses, interest and tax.
- Operating profit margin: operating profit divided by revenue. It excludes interest and tax but includes operating expenses such as rent and salaries.
- Net profit margin: net profit divided by revenue. It includes all expenses and tax, giving the fullest picture of profitability.
For a deeper look at gross profit, see this guide on what gross profit margin is.
How to improve your net profit margin
Improving your net profit margin means either increasing revenue or reducing costs. Here are practical levers you can pull.
- Raise prices where your value proposition supports it.
- Reduce cost of goods sold by negotiating with suppliers or sourcing more efficiently.
- Cut unnecessary overheads such as unused subscriptions or excess inventory.
- Improve operational efficiency to get more output from your resources.
For more strategies, see this guide on how to increase profits.
Track your net profit margin with Xero
Keeping an eye on your net profit margin helps you make confident decisions about pricing, costs and growth. With Xero, you can run profit and loss reports that show your margins at a glance. Xero's financial reporting tools pull your data together so you can see exactly where your money goes. Ready to try it? Get one month free and start tracking your profitability today.
FAQs on net profit margin
Here are answers to common questions about net profit margin.
What is the difference between net profit and net profit margin?
Net profit is the rand amount left after all expenses and taxes. Net profit margin expresses that amount as a percentage of revenue, making it easier to compare across periods or businesses of different sizes.
Can a business have a high net profit margin but still struggle?
Yes. A high margin does not guarantee strong cash flow. If customers pay late or you hold too much stock, you may still face cash shortages despite solid margins.
How often should I check my net profit margin?
Review it monthly or quarterly. Frequent checks help you spot trends early and respond to rising costs or dipping sales before they become serious problems.
Does net profit margin include owner drawings?
No. Owner drawings are not an expense, so they do not affect net profit margin. Drawings reduce equity, not profit.
Related terms
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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.