It is defined as the ratio of net income generated in a year to total sales / revenue.
NPM = PAT / Sales
In case of ABC Inc, NPM is 12% (12000/100000=0.12). This means that for every Rs 100 worth of auto parts sold by ABC Inc, a net income of Rs 12 was generated. As explained in our article on Income statement, we know that we need to deduct many items from total sales / revenue, to arrive at net income number. Items like cost of goods sold, interest, taxes and others are subtracted from total sales / revenue, to finally arrive at net income. The NPM ratio tells us how efficiently a company is converting its sales to profit. Better management of taxes, raw materials, inventory and operational efficiency can lead to substantial profits. Thus in case of two different companies of same size which operate in the same sector, the company which has higher NPM is more efficient, as it can generate more profits by selling the same amount of goods.