Net profit margin is the ratio of net profits to sales or revenue for a business or business segment. The metric is measured as a percentage and shows how much of each dollar in revenues translates directly into profits. Generally, the higher the net profit margin the better, but depending on the industry, a low profit margin can still equate to a large magnitude of profits in dollar terms.
The formula for net profit margin is:
Net profit margin = net profit / total revenue
For example, assume a business sells three products that generated $100,000, $50,000, and $80,000 in sales. Overall, the net profit of the company was $50,000. Net profit margin is:
$50,000 / ($100,000 + $50,000 + $80,000) = 21.7%