Net Profit Margin
| The net profit margin is the percentage of profit remaining after all expenses are subtracted from revenues. |
Sunny’s Sunglasses Shop had net earnings of $15,283, which represents a net margin of 10.6%.
How to Calculate Net Profit Margin
| Net Profit Margin = Net Income/Sales |
Sunny has managed to make a profit from his small business, and increase the value, or equity, of his company.
This is truly a bottom line goal of any business.
To understand why net earnings increase the value of a company, click on accounting formulas.
Sunny Sunglasses Shop falls slightly below the S&P 500 company averages, but more importantly and more relevantly, above its main competitor, Luxottica Group, and its industry, Specialty Retail, Other:
Net Profit Margins
| Company | Average Net Profit Margin |
| Microsoft | 33% |
| Software Industry | 24.4% |
| S&P 500 | 13.2% |
| Sunny Sunglasses Shop | 10.6% |
| Sunglasses Hut Int. (Luxottica Group) | 7.1% |
| Specialty Retail, Other | 5.8% |
This does not mean that Sunny could not improve the company bottom line further, especially by investigating operating expenses which took the biggest chunk of the company’s profits.
Sunny started on his road to profits by finding an industry with high gross profit margins.
As one Wall Street analyst commented when Luxottica purchased Sunglasses Hut International for $462 million in 2001, “The attraction of both prescription glasses and sunglasses is that they have an unbelievable gross margin. It’s a very profitable business.”
The Income Statement Format
The income statement format separates revenue and expenses from the main operations of the business, called net operating income or EBIT, from revenue and expenses incidental to the business that are included in net income.
Since Sunny Sunglasses Shop sells Sunglasses, the main operating revenue of $144,000 is from sales. Repairing Sunglasses, measured in “Repair Revenue,” is incidental to the business and categorized outside of operating income. Similarly, accountants do not consider interest and taxes as an operating expense, and separate it from the main operating expenses of the business.
Another main difference between operating profit margins and net margins are tax rates. Sunny Sunglasses Shop has lower tax rates on less taxable income than its much larger competitor, and managed to come out ahead in net margins.
Each of these key operating margins should be tracked year to year to see if they are increasing, or decreasing, and why.
The Income Statement Format
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Hi Francisco,
The company data is based on real data which tends to change from year to year. Sunny Sunglasses Shop is a fictional company, but the data used is real to compare with competition, other industries, etc. Since writing the above LUX changed from specialty retail to apparel. More info on how LUX stacks up against competition can be found here.
Kenneth Meunier
Sorry for resurrecting this old post but I have a question. Does the profit margin stated here for Sunglasses Hut is based on real data, or was it just a wild guess? I just want to understand aproximatelly what´s the profit margin of retail stores on the glasses industry. Thanks.
Hi Mark –
Yes, ROI is certainly a critical measure for investments, and also for business! In fact in business it is net income/assets, so you will see companies that have higher net profit margins with higher ROI (assuming equal assets). See also return on assets where companies with higher profit margins tend to have higher ROI.
Kenneth
Always been told in economics 101 class at High School that 99% of small companies work on a net profit within the 8-10% range. Generally they don’t even work on a profit percentage but on a return of their investment outlay.
As long as they get a better return than they would get from a bank, they are happy as Larry on laughing gas!