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Definition:
The net operating profit margin formula is a profitability ratio that measures a company’s operating income as a percentage of its net sales revenue.
Formula:
The net operating profit margin = (Operating income / Net sales revenue) x 100%
Operating income = Gross income – Operating expenses
Net sales revenue = Gross sales revenue – Sales returns and allowances – Discounts
Example:
A company has $1,000,000 in net sales revenue and $400,000 in operating income. To calculate its net operating profit margin, we would use the following formula:
Net Operating Profit Margin = (Operating income / Net sales revenue) x 100%
Net Operating Profit Margin = ($400,000 / $1,000,000) x 100% = 40%
This means that for every dollar of sales revenue, the company is earning $0.40 in operating income after deducting its operating expenses. A Net Operating Profit Margin of 40% is considered quite good, as it indicates that the company is able to generate a high level of profit from its operations.
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