Net Profit Ratio Definition
The net profit ratio is a financial ratio that measures the percentage of net income (net profit) to total revenue. The net profit margin, on the other hand, expresses net income as a percentage of total assets.
Both ratios are used to assess a company’s profitability. A high ratio indicates that a company is generating a large amount of profits relative to its revenue or assets, while a low ratio indicates the opposite.
The net profit ratio is calculated by dividing net income by total revenue. For example, if a company has net income of $100,000 and total revenue of $1 million, its net profit ratio would be 10%.
The net profit margin is calculated by dividing net income by total assets. For example, if a company has net income of $100,000 and total assets of $1 million, its net profit margin would be 10%.
While the two ratios are similar, they provide different insights into a company’s profitability. The net profit ratio looks at profitability in relation to revenue, while the net profit margin looks at profitability in relation to assets.
Both ratios can be useful for assessing a company’s financial health and performance over time. However, it is important to compare companies within the same industry when using these ratios, as different industries have different average profitability levels.
