Which statement correctly defines net profit margin?

Which statement correctly defines net profit margin?

• A. EBIT divided by sales
• B. Sales divided by total assets
• C. Net income divided by total assets
• D. Net income divided by sales

Answer: (D)

Net profit margin measures how much of each dollar of sales becomes profit after all expenses. It is calculated by dividing net income by sales, because net income is the profit left after all costs, taxes, and interest. This ratio shows the portion of revenue that actually translates into profit per sale. The statement net income divided by sales matches this definition. In contrast, EBIT divided by sales is an operating-profit measure before interest and taxes, sales divided by total assets is asset turnover (sales per asset), and net income divided by total assets is return on assets. Thus, multiplying net income by sales in the denominator captures profitability per sales dollar, which is why this option is correct.

Net profit margin measures how much of each dollar of sales becomes profit after all expenses. It is calculated by dividing net income by sales, because net income is the profit left after all costs, taxes, and interest. This ratio shows the portion of revenue that actually translates into profit per sale. The statement net income divided by sales matches this definition. In contrast, EBIT divided by sales is an operating-profit measure before interest and taxes, sales divided by total assets is asset turnover (sales per asset), and net income divided by total assets is return on assets. Thus, multiplying net income by sales in the denominator captures profitability per sales dollar, which is why this option is correct.