Net profit: formula, example and analysis
Net profit is the bottom-line financial result for a period after accounting for all revenues and expenses, including interest and income tax. It is a key indicator of value creation for owners; it is calculated on an accrual basis and is not equal to cash flow.
What the Metric Measures
It reflects the actual profitability of the business after obligations to creditors and the state. It shows the combined effect of price, cost of goods, operating expenses, and financial structure.
Calculation
- Net profit = Profit before tax (PBT) − Income tax
- Broken down: Revenue (net) − COGS − SG&A − Depreciation and amortization ± other operating items − Interest ± non-operating items − Taxes
- Net margin, % = Net profit / Revenue × 100
Align accounting policies for discounts/returns, expense capitalization, FX, and “one-time” events.
Calculation example
Revenue excluding VAT is 5,000,000, cost of goods 3,100,000, operating expenses (SG&A) 1,200,000, depreciation 150,000 and interest 70,000. Profit before tax = 480,000, tax at 18% = 86,400, net profit = 393,600, net margin = 7.9%.
Data Sources
P&L and general ledger in ERP/1C, sales/procurement modules, COGS costing, SG&A registers, loan accounting, and tax registers; consistent product/channel/department reference data and a single consolidation currency.
Interpretation
- Price–volume–mix: break down margin changes by driver
- Cost discipline: excessive SG&A growth squeezes the result
- Financial structure: interest and exchange rate differences affect the net result
- Profit ≠ cash: depreciation is non-cash; working capital affects cash but not profit
Useful Breakdowns
- Products / categories / SKUs; channels and regions
- Financial responsibility centers
- B2C / B2B, new / repeat customers
- Currencies / markets
- Recurring vs one-time items
Dashboard Visualizations
- Trend of net profit and net margin, % with year-over-year comparison
- Waterfall/bridge from revenue to net profit
- Plan vs actual and forecast to the end of the period
- Segment contribution (products/channels/regions)
- Period-to-period bridge: price, volume, mix, COGS, SG&A, interest, taxes, FX
How to Set Targets
Set a target net margin and limits on SG&A as a % of revenue, a discount policy, and rules for ROS/EBITDA. Maintain a rolling forecast with scenarios (prices, mix, FX, rates, taxes) and risk buffers.
Common Mistakes
- Including VAT in revenue or mixing cash and accrual methods
- Inconsistent accounting for discounts/returns
- Misclassification between COGS and SG&A
- Ignoring one-time items in comparisons
- FX chaos and missing eliminations within a group of companies
Discussion Questions
- Which drivers determined net profit this period?
- What is the baseline level (excluding one-time effects)?
- How much of net profit converts into operating cash flow?
- Which segments consistently deliver margin, and where is action needed?