2 min read
Definition
Net margin is net profit divided by revenue, expressed as a percentage. It shows the proportion of each pound of sales that survives all costs — including overheads, interest and tax — to become profit.
In plain terms
Sell £100 and keep £8 after everything, and your net margin is 8%. It's the truest measure of how profitable your trading really is.
Why it matters for your company
Thin or falling net margins worry lenders and leave little room to service debt. Understanding your margin is core to affordability. See how lenders read your accounts.
In practice
Picture a UK limited company reviewing its year-end accounts. Turnover looks healthy and gross margin holds up fine, but once overheads, finance costs and tax are stripped out, net margin tells a much leaner story. A director who only watches the top line can be caught off guard by how much is absorbed before anything reaches the bottom.
The gap between gross and net margin usually points to where the money is actually going — rent, salaries, loan interest, or a tax bill that lands at an inconvenient moment. Tracking net margin over several periods, rather than a single snapshot, shows whether the business is genuinely becoming more efficient or just riding a good sales quarter while costs quietly creep up underneath.
How lenders read it
When a lender reviews a set of company accounts, net margin is rarely looked at in isolation — it's read alongside turnover trend, sector norms and how consistent the figure has been year on year. A single weak year against an otherwise stable trend reads very differently from a persistent decline, so context matters as much as the number itself. See how lenders read your accounts for the fuller picture.
It's also worth distinguishing net margin from measures like EBITDA, which strip out financing and non-cash costs to show underlying trading performance. A company can have solid EBITDA but a thin net margin because of debt servicing or one-off charges — useful context for a director trying to explain their numbers clearly to a lender.
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