The Net Profit Ratio is a profitability ratio used by hotel revenue managers to understand profitability after certain costs. It is a KPI that removes taxes to provide a more accurate picture of the relationship between net profits and net sales.

A higher net profit ratio signals a more efficient hotel management. A lower ratio means that managers should look for opportunities to improve hotel efficiency. Net Profit Ratio is often reported on a trend line so that managers can compare a hotel’s performance over time.

What is Net Profit Ratio For?

Generally, a hotel should calculate its net profit ratio at least once per calendar year. This allows it to make annual comparisons and evaluate whether or not the hotel is improving its overall profitability. Annually calculating Net Profit Ratio also allows managers to compare their hotel to industry averages, as well as the ratio they’ve previously budgeted for.

Benefits of Net Profit Ratio

The main benefit of using Net Profit Ratio as a KPI is that it reveals the amount of remaining profit after factoring in operational costs such as production, administration, financing, and income taxes. In conjunction with an analysis of how a hotel is efficiently utilizing its working capital, Net Profit Ratio is one of the most useful KPIs for revenue managers to evaluate a hotel’s overall performance.

Limitations of Net Profit Ratio

A significant limitation of Net Profit Ratio as a KPI is that it should not be used as a measure of a hotel’s cash flow. This is because it does not include non-cash expenses, such as accrued expenses, amortization, and depreciation. It is also better used as a short-term metric because it does not account for a hotel’s actions to maintain long-term profitability.

How is Net Profit Ratio Calculated

The Net Profit Ratio is calculated by dividing net profit after tax by net sales. The final ratio is expressed as a percentage by multiplying the result by 100.

Example of Net Profit Ratio Calculation

Net Profit Ratio = (Net Profit After Tax / Net Sales) x 100

Net Profit After Tax = $3,250,000
Net Sales = $36,550,000

Net Profit Ratio = ($3,250,000 / $36,550,000) x 100 = 8.89%