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The profit margin ratio formula can be calculated by dividing net income by net sales. Net sales is calculated by subtracting any returns or refunds from gross sales.nalysis. The profit margin ratio directly measures what percentage of sales is made up of net income. In other words, it measures how much profits are produced at a certain level of sales. This ratio also indirectly measures how well a company manages its expenses relative to its net sales.
Net profit is not an indicator of cash flows, since net profit incorporates a number of non-cash expenses, such as accrued expenses, amortization, and depreciation. The formula for the net profit ratio is to divide net profit by net sales, and then multiply by 100. The formula is: (Net profit / Net sales) x 100. The measure could be modified for use by a nonprofit entity, if the change in net assets were to be used in the formula instead of net profit.