How to Calculate Income as a Percentage of Revenue

By Motley Fool Staff – Updated Apr 29, 2025 at 11:15PM

Key Points

Investing in high-profit companies is advised as stocks are tied to future earnings.
Profitability, measured by net income/revenue, aids in assessing and comparing firms.
A declining profit margin, like Acme's drop from 22% to 15%, signals potential issues.
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All things being equal, investors prefer buying pieces of highly profitable companies. After all, a stock is just a claim against future earnings, and so we ultimately want an enterprise that produces substantial profits over time. Conversely, if profitability is lower than average or trending down, it could be a sign to stay away from this particular stock.

Chart showing spiky line trending up and to the right with numbers in background.

Image source: Getty Images.

How to calculate

How to calculate income as a percentage of revenue

Profitability, sometimes called profit margin or net margin, is determined by calculating income as a percentage of revenue. The two figures that we need for this calculation are found in the income statement.

First, take the net income figure, which is the company's bottom-line profit after paying out all operating expenses, interest, and taxes. In this example, let's say Acme Widgets' net income amounts to $7.1 million in its last complete fiscal year.

Next, locate net revenue, which can also be called net sales. In this case, Acme booked $46 million of revenue last year. Now we have everything that we need to perform our two-step calculation:

Divide net income by net revenue – ($7.1 million)/ ($46 million) = 0.1543.
Multiply that result by 100 – (0.1543) X (100) = 15.43%.

Why it matters

Why does it matter?

This calculation tells us that Acme Widgets is a solidly profitable business. Specifically, for every $1 of sales that Acme logged last year, it generated $0.15 of income. In other words, its profit margin is 15%.

Profit margin is also useful in making comparisons between competitors and across time periods. For example, if Acme's two rivals in the industry both have 9% profit margins, then it suggests that Acme enjoys competitive advantages, such as brand strength or economies of scale, that allow it to generate profits that rivals just can't beat.