Net margin

Definition

Net margin is net profit divided by revenue, expressed as a percentage. A 10% net margin means the business keeps 10p of profit from every pound of sales after all costs — a core measure of profitability and pricing power.

Why it matters

Margin, not turnover, determines how much cash sales actually produce — and therefore true affordability. A thin margin on high turnover can still mean little borrowing capacity. See turnover-based lending.

In practice

Picture a UK limited company with steady sales but rising input costs. Revenue can hold up or even grow while net margin quietly narrows, because costs such as materials, wages or rent are eating a bigger share of each sale before profit is struck. Directors sometimes only spot this when they compare periods side by side rather than looking at a single month in isolation.

A useful habit is tracking net margin alongside operating profit rather than revenue alone. A company can look busy on the sales line yet have very little left after suppliers, payroll and finance costs are paid — which is the gap that net margin is designed to expose.

How lenders read it

Lenders tend to view net margin as a signal of resilience rather than a pass/fail test on its own. A company with a modest but stable margin can look steadier than one with a higher margin that swings sharply between periods, since volatility raises questions about how repeatable the profit really is.

Margin is usually read together with turnover and cash generation, because a healthy percentage on paper does not always translate into cash in the bank when receivables or seasonal costs are involved. Seeing margin trend in one direction over several periods generally carries more weight than any single snapshot.