What Is Net Profit Margin and What Level Is Healthy?
How much net profit is left out of every 100 of revenue. A falling trend within the same company usually matters more than the absolute level.
Net profit margin measures how much of every 100 of revenue is left as net profit after all costs, expenses, interest and tax. It is the bottom line of the income statement divided by the top line, and it shows how much of what a company sells it actually keeps.
How it is calculated
In words: net profit divided by revenue, times 100. A net margin of 12% means that for every 100 of sales, 12 ends up as profit attributable to shareholders. Because the numerator is net profit, it already includes one-off items, interest and tax — which makes it more "complete" than gross margin, and also easier for a single unusual quarter to distort.
A useful companion is gross margin (revenue minus direct costs). High gross margin with low net margin says the money is going to sales, research or interest; low on both usually means a competitive, thin-margin industry.
Rules of thumb
| Net margin | What it usually means |
|---|---|
| Below 0% | The company is currently lossmaking |
| 0% to 5% | A very thin cushion; a small setback can flip it to a loss |
| 5% to 10% | Ordinary |
| 10% to 20% | Usually considered healthy |
| Above 20% | Strong pricing power, or an asset-light, high-barrier business |
These bands are conventions and industries differ enormously: retailers, airlines and contract manufacturers can thrive below 5% for decades, while software, branded consumer goods and exchanges often run above 20%. A margin that keeps sliding at the same company for several quarters usually deserves more attention than its absolute level.
What it does not tell you
- Scale. A 30% margin on tiny revenue can mean far less profit than 5% at a giant.
- Cash. Net profit is an accounting figure and can diverge widely from operating cash flow.
- Sustainability. A one-off asset sale or tax refund can spike a single period's margin.
In Stock Compass
On the card's second fundamentals row, "Margin" shows as a whole-number percentage and turns green at 10% or above. It is occasionally missing for HK and A-share listings and is simply omitted then.
In the verdict's business-quality dimension, a margin below 0% is a caution ("the company is currently lossmaking"), 10% or above is a positive ("N of every 100 in revenue becomes profit"), and anything between is neutral ("a thin profit cushion"). If the fundamentals-trend module finds that margin or other metrics have clearly deteriorated since you bought, the verdict adds a separate "fundamentals deteriorating" note.
In strategy rules the indicator id is profit_margin_pct; example conditions are profit_margin_pct > 0 (the company must be profitable) or profit_margin_pct > 10. Written alongside ROE, it separates a high return that comes from margins from one that comes from leverage. For how to read margin shifts around results, see hold through earnings or sell.
FAQ
How is net margin different from gross margin?
Gross margin subtracts only direct costs; net margin subtracts everything including overheads, interest and tax. Gross margin shows whether the product itself makes money; net margin shows what the whole company keeps. The gap between them is operating and financing cost.
Is a 3% net margin bad?
It depends on the industry. Retail, logistics and contract manufacturing routinely run below 5% and earn through scale and turnover. Comparison with peers and the company's own trend is more informative than the raw number.
Why does Stock Compass stress the trend over the level?
Because the level is mostly set by the industry, while a persistent decline at one company usually points to weakening pricing power or rising costs — the kind of change that should make you revisit why you hold it.
Definition only — not investment advice.