Formula of gross profit versus net profit margin
What is the difference between gross profit margin and net profit margin?
Profit margin is a percentage measure of profit that expresses the amount a business earns per dollar of sales. If a business makes more money per sale, it has a higher profit margin. Gross profit margin and net profit margin, on the other hand, are two separate profitability ratios used to assess the financial stability and overall health of a business.
Key points to remember:
- Gross profit margin is the percentage of revenue that exceeds COGS.
- A high gross profit margin indicates that a business is successful in generating profits that exceed its costs.
- The net profit margin is the ratio of the net profits to the income of a business; it reflects how much every dollar of income turns into profit.
Understanding gross profit margin and net profit margin
While gross margin and gross margin are two measures of profitability, net profit margin, which includes a company’s total expenses, is a much more definitive measure of profitability and the most scrutinized by analysts and investors. Here’s a more in-depth look at gross profit and net profit margin.
Gross profit margin is a measure of profitability that shows the percentage of revenue that exceeds cost of goods sold (COGS). Gross profit reflects the success of a company’s management team in generating revenue, given the costs involved in producing their products and services. In short, the higher the number, the more effective the management is at generating profit for every dollar of cost involved.
Gross profit margin is calculated by taking total revenue minus COGS and dividing the difference by total revenue. The gross profit result is usually multiplied by 100 to display the figure as a percentage. COGS is the amount it costs a business to produce the goods or services it sells.
Explain the Gross Vs. The net profit margin
Example of gross profit margin
For the fiscal year ending September 30, 2017, Apple reported total revenue or revenue of $ 229 billion and COGS of $ 141 billion, as shown in the company’s consolidated 10K statement. below.
Apple’s gross profit margin for 2017 was 38%. Using the formula above, it would be calculated as follows:
$ 229 billion($ 229 billion–141 billion dollars)??100=38%
This means that for every dollar Apple generated in sales, the company generated 38 cents in gross profit before other business expenses were paid. A higher ratio is usually preferred, as this would indicate that the business is selling inventory for a higher profit. Gross profit margin provides a general indication of a company’s profitability, but it is not a precise measure.
Gross profit is shown as a percentage, while gross profit is an absolute dollar amount.
Gross profit margin versus gross profit margin
It is important to note the difference between gross profit margin and gross margin. Gross profit is shown as a percentage, while gross profit is an absolute dollar amount.
Gross profit is the absolute dollar amount of revenue a business generates in excess of its direct production costs. So, another rendering of the gross margin equation becomes gross profit divided by total revenue. As stated in the above statement, Apple’s gross margin figure was $ 88 billion (or $ 229 billion minus $ 141 billion).
In short, the gross margin is the total number of gross margin after subtracting COGS revenue, which is $ 88 billion in the case of Apple. But the gross margin is the percentage of profits that Apple generates over the cost of producing its products, which is 38%.
The gross margin figure has little analytical value because it is an isolated number rather than a figure calculated based on both costs and revenues. Therefore, the gross profit margin (or gross margin) is more important for market analysts and investors.
To illustrate the difference, consider a business with gross profit of $ 1 million. At first glance, the profit figure may seem impressive, but if the company’s gross margin is only 1%, a mere 2% increase in production costs is enough to cost the company money. business.
The net profit margin
Net profit margin is the ratio of net profits to the income of a business or business segment. Expressed as a percentage, net profit margin shows how much of every dollar a business collects as revenue translates into profit.
Net profitability is an important distinction, because increases in income do not necessarily translate into increased profitability. Net profit is gross profit (income minus COGS) less operating expenses and all other expenses, such as taxes and interest paid on debt. Although it may sound more complicated, net income is calculated for us and recorded in the income statement as net income.
The net profit margin=Returned(NOTI)×100or:OR=Net revenueR=ReturnedOE=Operating ExpensesO=Other expensesI=Interest
Example of net profit margin
Apple reported net sales of approximately $ 48 billion (highlighted in blue) for the fiscal year ending September 30, 2017, as shown in its consolidated 10K statement below. As we saw earlier, Apple’s total sales or revenue was $ 229 billion for the same period.
Apple’s net profit margin for 2017 was 21%. Using the above formula, we can calculate it as:
$ 229 billion48 billion dollars=0.21
A 21% net profit margin indicates that for every dollar Apple generated in sales, the company retained $ 0.21 in profit. A higher profit margin is always desirable because it means that the business is making more profit from its sales.
However, profit margins may vary by industry. Growth companies may have a higher profit margin than retail companies, but retailers offset their lower profit margins with higher sales volumes.
It is possible for a business to have a negative net profit margin. A negative net profit margin occurs when a business has a loss for the quarter or year. This loss, however, may only be a temporary problem for the business. The reasons for the losses could be the increase in the cost of labor and raw materials, periods of recession and the introduction of disruptive technological tools that could affect the results of the company.
Investors and analysts typically use both gross profit and net profit margin to gauge the effectiveness of running a business in generating profits against the costs involved in producing their goods and services. It is wise to compare the margins of companies within the same industry and over different time periods to get a sense of trends.