How to calculate it
Take net income for a period, divide it by revenue for the same period and multiply by 100. Both numbers come from the income statement. Use revenue before GST/HST, because the tax you collect is passed on to the government rather than earned.
Net profit margin differs from gross margin, which stops after direct costs. Net margin continues through overhead, depreciation, interest and tax, so it is generally lower. The gross profit and net income pages cover those two figures in dollars.
A worked example
For illustration, an incorporated design studio has $250,000 of revenue in a year and net income of $20,000 after all expenses and corporate income tax. Its net profit margin is $20,000 divided by $250,000, which is 8%.
If revenue grows to $300,000 but net income stays at $20,000, the margin falls to about 6.7%. The dollar profit is unchanged while each sale is keeping less, which suggests costs grew along with sales. The figures are round and illustrative only.
Why comparisons need care
A good margin depends heavily on the industry, so compare against similar businesses and your own history rather than a universal target. Because the ratio is built from net income, anything that distorts net income distorts the margin: a one-time sale of equipment, a large bad debt or an unusual month of expenses.
Business structure matters too. A sole proprietor’s net income is calculated before any drawings, since the owner is not paid a salary as an expense. A corporation generally records a salary paid to its owner as an expense. Two otherwise identical businesses can therefore show quite different margins.
What to discuss with your accountant
Ask whether your statements are complete and use accrual accounting before relying on the ratio for a decision. Review which costs moved the margin, and whether owner pay is treated consistently from year to year.
Margin says nothing about timing. A profitable business can still run short of cash, so look at it alongside your cash flow.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
- What is the net profit margin ratio?BDC
- What is the gross profit margin ratio?BDC
- What is an income statement?BDC
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.