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How net profit margin works

Net profit margin is net income divided by sales. On $45,000 of net income and $500,000 of sales it is 9 percent. Times 0.625 asset turnover, that is the 5.625 percent ROA on the same sheet, and times the 2.67 multiplier it is 15 percent ROE.

DuPont ROE

15.00%

Margin 9.00%, turnover 0.625, multiplier 2.67.

Net margin
9.00%
Asset turnover
0.625
Equity multiplier
2.67
ROA
5.63%
ROE
15.00%
$

Profit after interest and tax.

$

Sales for the same period as net income.

$

Book assets. The equity multiplier is assets over equity.

$

Shareholders' equity, not market cap.

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Operating against financial leverage

In short

  • Net margin is NI/SalesNI / Sales. On $45,000 over $500,000 that is 9 percent.
  • Times 0.625 turnover: ROA 5.625 percent. Times the 2.67 equity multiplier: ROE 15 percent.
  • $60,000 on $400,000 of sales is a 15 percent margin, 0.5 turnover, 7.5 percent ROA, 10 percent ROE.
  • $80,000 on $1,000,000 of sales is an 8 percent margin, turnover of 2, 16 percent ROA, 20 percent ROE.
  • How gross margin works is the line above operating costs, on a different sheet. This page is the residual after interest and tax.

What is left of each sales dollar

Net profit margin asks what share of sales survived all the way to the residual:

Net margin=Net incomeSales\text{Net margin} = \frac{\text{Net income}}{\text{Sales}}

On $45,000 of net income against $500,000 of sales that is 9 percent. DuPont multiplies that 9 percent by 0.625 asset turnover to get 5.625 percent ROA, then by the 2.67 equity multiplier to get 15 percent ROE. The DuPont calculator on this page is that product. This page owns the 9 percent.

Gross margin against net margin is the line after cost of goods against the line after everything. Those two live on different teaching sheets. Do not paste a 35 percent gross margin onto this 9 percent residual.

A wider margin on slower turns

Net income $60,000 on $400,000 of sales is a 15 percent margin. Turnover 0.5 on $800,000 of assets. ROA 7.5 percent. ROE 10 percent on $600,000 of equity.

Margin rose from 9 percent to 15 percent. Turnover fell. Ranking on margin puts this sheet first. Ranking on ROE puts the first sheet first, at 15 percent against 10 percent. Both rankings are the same four inputs, weighted differently.

A thinner margin on faster turns

Net income $80,000 on $1,000,000 of sales is an 8 percent margin. Turnover 2 on $500,000 of assets. ROA 16 percent. ROE 20 percent on $400,000 of equity.

The margin is narrower than the first sheet's 9 percent. ROE is higher. A grocer and a specialist can print the same ROE with margins that do not belong in one ranking.

After interest, after tax

Net income is after the coupon and after tax. A heavier interest bill lowers this margin even if sales and operating profit did not move. Interest coverage is whether that coupon is covered. Gross margin stops at cost of goods, before those lines.

NOPAT takes tax off operating profit and leaves the coupon out. Mixing net margin with a NOPAT margin is how a financing choice gets read as an operating choice.

One period, one consolidation

Sales and net income have to come from the same stretch of time. A year of sales against a quarter of profit is not a margin. Market cap in the denominator is earnings yield, not this ratio. Book equity in the denominator is ROE.

What this page is not doing

It is not gross margin, not a target of 9 percent, and not the wholesale sheet that prints 35 percent after cost of goods. The three sheets are 9 percent on $45,000 over $500,000, 15 percent on $60,000 over $400,000, and 8 percent on $80,000 over $1,000,000. This is educational material, not financial advice.

Worked examples

Nine percent on the first DuPont sheet

Net income $45,000, sales $500,000, assets $800,000, equity $300,000. What is net margin?

  1. Net margin: 45000/500000=0.0945000 / 500000 = 0.09, 9 percent.
  2. Asset turnover 0.625, multiplier 2.67, ROA 5.625 percent, ROE 15 percent.

Net margin is 9 percent. Turnover 0.625, multiplier 2.67, ROA 5.625 percent, ROE 15 percent.

Fifteen percent on slower turns

Net income $60,000, sales $400,000, assets $800,000, equity $600,000. What is net margin?

  1. Margin: 60000/400000=0.1560000 / 400000 = 0.15, 15 percent.
  2. Turnover 0.5, multiplier 1.33, ROA 7.5 percent, ROE 10 percent.

Net margin is 15 percent. Turnover 0.5, multiplier 1.33, ROA 7.5 percent, ROE 10 percent.

Eight percent on faster turns

Net income $80,000, sales $1,000,000, assets $500,000, equity $400,000. What is net margin?

  1. Margin: 80000/1000000=0.0880000 / 1000000 = 0.08, 8 percent.
  2. Turnover 2, multiplier 1.25, ROA 16 percent, ROE 20 percent.

Net margin is 8 percent. Turnover 2, multiplier 1.25, ROA 16 percent, ROE 20 percent.

Common questions

Is 9 percent a good net margin?

It is $45,000 over $500,000 on the teaching sheet. A grocer and a specialist print different margins on purpose. Compare inside a sector.

Why is this not gross margin?

Gross margin stops at cost of goods. Net margin is after interest and tax. The 35 percent wholesale sheet is a different firm from this 9 percent residual.

Does a wider margin mean a higher ROE?

Not on its own. The second sheet has a 15 percent margin and a 10 percent ROE, below the first sheet's 9 percent margin and 15 percent ROE. This is educational material, not financial advice.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.