Net Profit Ratio

Net Tax profit Ratio is a type of Profitability Ratio that determines the relative relation between Net Profit and Net Sales. It indicates the Net Profit in Net Sales.
$$Net\quad Profit\quad Ratio=\frac { Net\quad Profit }{ Net\quad Sales }$$
Where,
• Net Profit = Net Sales – (Cost of Goods Sold + Operating Expenses + Depreciation /Amortization + Interest Expenses + Tax paid)
• And Net Sales is the Total Revenue from Sales.
• Net Profit Ratio multiplied by 100 provides the Net Profit Margin in percentage terms.

Significance and Interpretation

• Net Profit Margin of a Company is the narrowest measure of profit as compared to Gross Profit Ratio, Operating Profit Ratio, and Predix Profit Ratio. Net Profit Margin considers all necessary expenses incurred by the company including Depreciation, Amortization, Interest Expenses, and Taxes.
• Net Profit Margin of a company is always less than Gross Profit Ratio, Operating Profit Ratio, and Pretax Profit Ratio due to the addition of the tax element.
• Gross Profit Ratio > Operating Profit Ratio > Pretax Profit Ratio > Net Profit Ratio

Examples

Example 1:

Given below are few details of M/S XYZ Ltd., use them an calculate the Net Profit Ratio for M/S XYZ Ltd.
Particulars Amount (in Rs.)
Revenue from Sales (Cash) 250000.00
Revenue from Sales (Credit) 25000.00
Cost of Labour 45000.00
Material Cost 45000.00
Salary Expense 90000.00
Rent of Premises 40000.00
Insurance Expenses 15000.00
Depreciation 15000.00
Interest Expenses 5000.00
Taxes Paid @30% on PBT 6000.00

Solution:

Cost of Goods Sold = Cost of Labour + Material Cost
Rs. 90000
Operating Expenses = Salary Expense + Rent of Premises + Insurance Expenses
Rs. 145000
Net Sales Revenue = Cash Revenue from Sales + Credit Revenue from Sales
Rs. 275000
PBT or Profit Before Tax = Net Sales – (Cost of Goods Sold + Operating Expenses + Depreciation/Amortization + Interest Expense)
275000 - (90000 + 145000 + 15000 + 5000)
Rs. 20000.00
Net Profit = PBT – Tax
20000 – 6000
Rs. 14000
Net Profit Ratio = Net Profit / Net Sales
14000 / 275000
14 / 275
Hence, Net Profit Ratio = 14 /275 or 0.0509 or 5.09%