What does the net profit margin indicate?

The net profit margin measures how effectively a company turns its revenue into profit. It indicates the percentage of revenue that remains as profit after all expenses, including operating costs, interest, taxes, and depreciation, have been deducted from total sales. By expressing net income as a percentage of sales, the net profit margin provides valuable insight into a company's profitability and efficiency in managing its costs relative to its sales. A higher net profit margin suggests a more profitable company, as it retains more profit from each dollar of sales, while a lower margin may signal potential issues with cost management or pricing strategies.

This concept is fundamental in evaluating a company's financial health and can guide investment decisions, as it allows comparisons between companies within the same industry and assesses how well a company is performing over time.