Net profit ratio refers to the profitability margin of a company against its revenues and other expenses. The net profit ratio helps a company to understand how much profit it has made in a given period of time. There are many types of profitability ratios and the net profit ratio is one of them. One can easily calculate the net profit ratio of any company by using the net profit ratio formula and there are several advantages of using this metric. But before coming to that, it is important to figure out what the net profitability ratio is and how you can use it.

## Calculating Net Profit Ratio

The **net profit ratio formula** is pretty simple to understand. It comprises two major components: net profit and total revenue. The net profit is computed by deducting all the expenses from the revenues. This could include the cost of operations, taxation, etc. The net profit ratio formula is as follows:

Net Profit Ratio: Net Profit/Total Revenue/100

Let us understand the net profit ratio with the help of an example.

Suppose the profit made by a company named XYZ in a particular year is Rs 1,00,000. The total revenue it had for the year was Rs 3,00,000. By using the net profit ratio formula, we would get:

Net Profit Ratio = 1,00,000(Net Profit)/ 4,00,000 (Total Revenue) x 100 = 25%.

So the net profit ratio of the company XYZ in a given year would be 25%.

## Finding the Net Profit Turnover

Now, the question comes why do we calculate the net profit ratio? A simple answer to this would be to find out about the net profit turnover. Provided you have the formula and the values, you can calculate the net profit accordingly by denoting it as a variable. You can multiply the percentage of the net profit ratio by the total revenue and it will give you the net profit turnover of a company in a given year. This way, by just taking a look at the net profit ratio and by using the net profit ratio formula, you will be able to find out the net profit turnover of any company.

Another important quality of using the net profit ratio is that the data is given in the percentage form. A shareholder can find out the profit margin in every rupee. This makes the **profitability calculation** much easier.

## Disadvantages of Net Profit Ratio

But while there are numerous advantages of the net profit ratio, we also need to take into account the downsides of it.

- Companies can easily increase their net profit ratio by selling one of their assets. In simple terms, they will be able to increase the profit margin on a temporary basis. This means the figure that we get from the net profit ratio can be a bit misleading.
- Although the net profit ratio is an important factor, one cannot evaluate the company’s management and their efficiency of conducting the business operations through the help of the net profit ratio alone.
- A company can have greater revenue but less profit margin. On the other hand, another company can have a greater profit margin but less revenue. According to experts, the best way to use the net profit ratio between different companies is by comparing the companies that belong to the same sector.
- A low net profit ratio does not necessarily mean that the company is not faring well just as a high net profit ratio does not mean that the company is doing good.

Hence, while the net profit ratio can be used to calculate the net profit turnover of the company, it is important to take into account different factors to get a clearer picture.