The net profit margin shows how much of a company's revenue remains as profit after expenses and taxes. A net profit margin of 10% means that every 100 euros of revenue generate 10 euros of net income. Other margins, such as gross margin and EBIT margin, measure profit before different categories of expenses are deducted.
GrossProfitMargin > 0.3 and EBITMargin > 0.1
How are profit margins calculated?
Net profit margin = net income / revenue
This article uses “profit margin” to mean net profit margin; other sources may use it for a margin based on EBIT. A result of 0.1 is equivalent to 10%. Each margin divides a profit figure from the income statement by revenue:
| Margin | Profit figure in the numerator |
|---|---|
| Gross margin | Gross profit: revenue less cost of revenue, such as materials and production |
| EBITDA margin | EBITDA: earnings before interest, taxes, depreciation and amortization |
| EBIT margin in Critivest | Operating income: gross profit less selling, administrative, research and other operating expenses |
| Pretax profit margin | Income before tax: operating income plus net interest and other non-operating income |
| Net profit margin | Net income: after income tax |
EBIT stands for earnings before interest and taxes. Critivest uses operating income for EBIT, so the EBIT margin
(EBITMargin) and operating margin (OperatingProfitMargin) are identical here. Other data
sources may define EBIT differently.
Calculating margins: an example
The fictional Example Company, totals of the last four quarters:
| Item | Amount | Margin |
|---|---|---|
| Revenue | EUR 20 billion | |
| Gross profit | EUR 8 billion | 8 / 20 = 40% |
| EBITDA | EUR 4 billion | 4 / 20 = 20% |
| EBIT | EUR 3 billion | 3 / 20 = 15% |
| Income before tax | EUR 2.7 billion | 2.7 / 20 = 13.5% |
| Net income | EUR 2 billion | 2 / 20 = 10% |
What are the limits of profit margins?
- Typical margins differ widely between industries: retailers usually have low gross margins, while software companies have high gross margins. Comparisons are most meaningful within an industry.
- One-off effects such as goodwill impairments, restructuring costs or gains on disposals distort a year's margins.
- The EBITDA margin excludes depreciation and amortization. It can therefore be much higher than the EBIT margin for capital-intensive companies.
- With positive revenue, a margin is negative when its corresponding profit figure is negative. A net loss does not mean that gross margin or EBIT margin must also be negative. Margins cannot be calculated when revenue is zero.
- Margins do not show how much capital a company needs to generate its revenue. As a complementary measure, return on equity compares net income with equity.
Using margins as your own criterion
This condition is met if the gross margin is above 30% and the EBIT margin is above 10%. Enter percentages as decimals in conditions: 30% becomes 0.3.
GrossProfitMargin > 0.3 and EBITMargin > 0.1The Example Company meets it. You set the limits yourself; they are examples, not a recommendation.
Which periods does Critivest use for margins?
Revenue and profit figures are totals for the last four quarters. If four complete quarters are not available for a figure, Critivest uses the latest fiscal year's total instead. As a result, profit and revenue may cover different periods. Net income is attributable to the parent company's shareholders, after deducting the share of profit belonging to minority shareholders.
Banks and insurers usually do not report gross profit, so their gross margin is unavailable. The additional ratios
OperatingCashFlowMargin and FreeCashFlowMargin divide operating cash flow and free cash
flow, respectively, by revenue.
Periods and missing values: Methodology.
Formula reference in Critivest
Name in conditions: NetProfitMargin
NetProfitMargin = NetIncome / RevenueNet income divided by revenue over the last four quarters
Name in conditions: GrossProfitMargin
GrossProfitMargin = GrossProfit / RevenueGross profit divided by revenue over the last four quarters
Name in conditions: EBITDAMargin
EBITDAMargin = EBITDA / RevenueEBITDA (operating income plus depreciation and amortization) divided by revenue over the last four quarters
Name in conditions: EBITMargin
EBITMargin = EBIT / RevenueEBIT (operating income) divided by revenue over the last four quarters, the same as the operating profit margin
Name in conditions: OperatingProfitMargin
OperatingProfitMargin = OperatingIncome / RevenueOperating income divided by revenue over the last four quarters
Name in conditions: PretaxProfitMargin
PretaxProfitMargin = IncomeBeforeTax / RevenueIncome before tax divided by revenue over the last four quarters
Names used in conditions
NetIncome- Income statement, last 4 quarters or fiscal year: Net income
Revenue- Income statement, last 4 quarters or fiscal year: Revenue
GrossProfit- Income statement, last 4 quarters or fiscal year: Gross profit
EBITDA- Income statement, last 4 quarters or fiscal year: Operating income before depreciation and amortization (EBITDA)
EBIT- Income statement, last 4 quarters or fiscal year: Operating income before interest and tax (EBIT), excluding other non-operating income
OperatingIncome- Income statement, last 4 quarters or fiscal year: Operating income
IncomeBeforeTax- Income statement, last 4 quarters or fiscal year: Income before tax
Related formulas
- P/S ratio (price-to-sales ratio): The price-to-sales ratio compares market value with annual revenue. See how P/S and price-to-cash-flow ratios are calculated, with examples and limits.
- Return on equity: Calculate and interpret return on equity (ROE) with a formula, a worked example, DuPont analysis and the limits of low or negative equity.
Sources
- Principles of Finance, 5.1: The Income Statement, OpenStax
- Principles of Finance, 6.6: Profitability Ratios and the DuPont Method, OpenStax
- Profit margin, Wikipedia
- Operating margin, Wikipedia
- Gross margin, Wikipedia
Last updated: November 4, 2026