How much profit are we generating for each dollar in sales? The net profit margin is also known as return on sales or net income margin, or profit ratio. If our net profit margin is 20%, then for every dollar we sell, we make 20 cents in profit.

Knowing this number makes it easier to do comparisons between different product or different product lines we sell. This measure will indicate how efficient a company is. How well is the company controlling its costs? For example, do we need to shop around for a cheaper supplier or suppliers? If we are a manufacturing company can we find inefficiencies in the processes? Are the net profit margins going up or down over time and why? Do we have the data to compare ourselves to other the typical company in our industry?

Low net profit margins mean that a company has a lower “margin of safety” and that slight changes (lower sales or higher expenses) could quicky diminish and returns. Net profit margins are particularly useful when comparing them over time and looking for trends. They are also useful for comparing across industries.

For more information, The Main KPI Types has a list of some KPIs and their types.