Net profit is a good indicator of the efficiency of a firm. The net profit ratio or net profit margin ratio is determined by relating net income after taxes to net sales. Net profit here is the balance of profit and loss account which is arrived at after considering all non-operating incomes such as interest on investments, dividends received, etc. And non-operating expenses like loss on the sale of investments, provisions for contingent liabilities, etc.
The formula for calculating the net profit ratio is:
Net profit ratio = (net profit/net sales)X 100
This ratio is widely used as a measure of overall profitability and is very useful for proprietors. A higher ratio indicates a better position.