The Net profit ratio is the financial figure that shows the net profit gained by the business after paying the taxes. It can also be defined as the ratio between after tax profit figure to the net income. The Net Profit Ratio identifies the profit of the business when all the expenses such as production expense, administration expense and the financing expense is deducted from generated sales of the business. The net profit ratio is an ideal figure to find out the overall performance of the business and the degree of efficiency with which a business is using its capital. The net ratio is reported over a trend line to form a historical data that describes the performance of the business over time.
One thing must be kept in mind that net profit ratio is not an indicator of the cash flows within the system as it incorporates a number of non cash events of the business such as accrued expenses that are yet to be paid, depreciation expense that is spanned over years and the amortization expense that is related to intangible assets. The formula of net profit ratio can be shown as under:-
Net Profit Ratio = Net Profit/ Net Sales x 100
In this formula the net profit gained by the company after paying the taxes is divided by the net sales and the figure is then multiplied by 100. The major issue with the net profit ratio is that it is a short term ratio and does not show maintenance of the profitability over long term accounting period.
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