Your net profit margin shows you the bottom line: how much of each sales dollar is ultimately available for you, the owner, to draw out of the business or to receive as dividends. It's probably the figure you are most accustomed to looking at. This ratio takes into account all your expenses, including income taxes and interest.

 

If your net income is $500,000 and sales are $2,000,000, your profit margin is 25 percent (500,000 ( 2,000,000 = .25; expressed as a percentage this is 25 percent)

You should have some idea of the range within which you expect your profit margin to be, which will be determined in large part by industry standards. If you fail to meet your target, it could mean that you've set an unrealistic goal, or it could mean that you're doing something wrong. (However, the ratio itself will not point to what you may be doing wrong. Looking at your gross margin or operating margin is a better way to get a fix on the problem.)

Even if you meet your goal, you should always keep an eye on your profit margin. If it should decline, for example, it may indicate that you need to take a look at whether your costs are getting too high.