Net Profit Margin is defined as net profit divided by the revenue of the company for the most recent reported financial year. The ratio explains number of units of profit earned for every 100 units of revenue. For example if the net profit margin is 12%, it means that for every Rs.100 revenue, Rs.12 was converted into profit. Obviously higher the net profit margin the better.

For the purpose of analysis, one should compare the current year net profit with historical numbers to understand whether the company is operating efficiently. Net profit margin of 2 or more companies, operating in the same sector, can also be compared with each other to select the more profitable one.