Net profit margin is calculated as which of the following?

• A. Net profit margin equals net profit divided by sales.
• B. Net profit margin equals gross profit divided by sales.
• C. Net profit margin equals operating profit divided by sales.
• D. Net profit margin equals capital employed divided by sales.

Answer: (A)

Net profit margin shows how much profit remains from each unit of sales after every cost is accounted for. It uses net profit, which is the profit after all expenses, taxes, and interest, divided by sales (revenue). This captures overall profitability for the period, not just production efficiency or operating performance. Expressed as a percentage, it tells you how effectively the business converts sales into actual profit.

Using gross profit would ignore operating expenses, and using operating profit would still exclude financing and tax effects, so neither reflects the full bottom-line profitability. Capital employed divided by sales isn’t a margin of profitability at all but relates to how much capital is used relative to sales.