Definitions 
The net profit ratio is net profit expressed as a percentage of total sales. Net profit is taken before tax and other indirect costs.
Essentially the net profit ratio tells us about how the company's profits relate to their sales. Different industries have fundamentally different net profit ratios. The net profit ratio can tell us about the nature of the industry the company is operating in as well as serving to compare past performances of a company.
The Net Profit Ratio Formula
The formula for the net profit ratio is as follows:
Net Profit Ratio (%) = (Net Profit before Tax / Total Revenues) x 100.
Example: Calculating the Net Profit Ratio
Let us consider an example where a local supermarket, over the period of 1 year, produces the following results:
- Sales of: $4 million
- Cost of sales: $3.5 million
- Employee costs: $0.2 million
- Other costs: $0.1 miillion
- Net profit: $0.2 million (4 - 3.5 - 0.2 - 0.1)
In this case we can calculate the net profit ratio to be 5%. ((0.2 / 4) * 100)
