Net Profit Margin is calculated as Net Income divided by which metric?

Net Profit Margin is calculated as Net Income divided by which metric?

• A. Revenue
• B. Total assets
• C. Total liabilities
• D. Shareholders' equity

Answer: (A)

Net profit margin shows how much profit is earned from every dollar of sales. To express this as a ratio, you compare net income to revenue, so the calculation is net income divided by revenue (and you typically multiply by 100 to get a percentage). Revenue is the appropriate base because it reflects the scale of business activity—the sales the company generated—so the margin indicates profitability per unit of sales. Using total assets or total liabilities would measure efficiency or leverage, not profit per sale, and using shareholders’ equity would measure return on equity, which is profit relative to investor funding rather than revenue. For example, if net income is 50 and revenue is 200, the net profit margin is 25%.

Net profit margin shows how much profit is earned from every dollar of sales. To express this as a ratio, you compare net income to revenue, so the calculation is net income divided by revenue (and you typically multiply by 100 to get a percentage). Revenue is the appropriate base because it reflects the scale of business activity—the sales the company generated—so the margin indicates profitability per unit of sales. Using total assets or total liabilities would measure efficiency or leverage, not profit per sale, and using shareholders’ equity would measure return on equity, which is profit relative to investor funding rather than revenue. For example, if net income is 50 and revenue is 200, the net profit margin is 25%.