Gross Margin vs. Profit Margin: What's the Difference?

By

Updated May 18, 2021

Reviewed by

Fact checked by

Gross Margin vs. Profit Margin: An Overview

Gross margin and profit margin are profitability ratios used to assess the financial health of a company. Both gross profit margin and profit margin—more commonly known as net profit margin—measure the profitability of a company as compared to the revenue generated for a period. Both ratios are expressed in percentage terms but have 澳洲幸运5官方开奖结果体彩网:distinct differences between them.

澳洲幸运5官方开奖结果体彩网:Profit margin is a percentage measurement of profit that expresses the amount a company earns per dollar of saleꦏs. If a company makes more money per sale, it has a higher profit margin.

Key Takeaways

Both gross profit margin and net profit margin are used to determine how efficient a company's management is in earning profits.
The gross profit margin provides an indication of how efficiently a company produces its goods given the costs involved.
The gross profit margin is calculated by deducting from the revenue the costs associated with the production, such as parts and packaging.
The net profit margin is the bottom line of a company in percentage terms and is the ultimate measure of profitability for a company.
The net profit margin is calculated by deducting from the gross profit operating expenses and any other expenses, such as debt.

Profit margin is the percentage of profit that a cಌompany retains after deducting costs from sales revenue. Expressing profit in tꦑerms of a percentage of revenue, rather than just stating a dollar amount, is more helpful for evaluating a company's financial condition.

If a company's $500,000 profit reflects a 50% profit margin, then the company is in solid 澳洲幸运5官方开奖结果体彩网:financial health, with revenues well above expenses. If that $500,000 is a mere 1% over the company's total 澳洲幸运5官方开奖结果体彩网:costs and expenses, then the company is barely solvent, and just the slightest increase in costs may be sufficient to push the company into 澳洲幸运5官方开奖结果体彩网:bankruptcy.

Gross Profit Margin

The 澳洲幸运5官方开奖结果体彩网:gross profit margin is the percentage of the company's revenue that exceeds its cost of goods sold. It measures the ability of a company to generate 澳洲幸运5官方开奖结果体彩网:revenue from the🦂 costs involved in production.

The gross profit margin is calculated by subtracting the 澳洲幸运5官方开奖结果体彩网:cost of goods sold (COGS) from revenue. The COGS, also known as the cost of sales, is the amoun🍸t it costs a company to produce the goods or services that it sells.

Example of Gross Profit Margin

Apple's net sales for the quarter ending June 27, 2020, were $59.7 billion, and its cost of sales was $37 billion for the period. Apple's gross profit margin for the quarter was 38%, ($59.7 billion - $37 billion) / $59.7 billion.

Below is the quarterly income statement for Apple Inc. (AAPL) as of June 27, 2020:

Important

It's useful to analyze the margins of companies over time to determine any trends and to compare the margins with companies in the same industry.

Net Profit Margin

When investors and analysts refer to a company's profit margin, they're typically referring to the net profit margin. The net profit margin is the percentage of net income generated from a company's revenue. Net income is ๊often referred to as the bottom line for a company or the net profit.

The net profit margin shows whether increases in revenue translate into increased profitability. Net profit includes gross profit (revenue minus cost of goods) while also subtracting 澳洲幸运5官方开奖结果体彩网:operating expenses and all otꦆher expenses, such as interest paid on debt and taxes.

Example of Net Profit Margin

For the quarter ending June 27, 2020, Apple's net sales were $59.7 billion and its net income was $11.3 billion for the period. Apple's net profit margin for the quarter was 18.9%, ($11.4 billion / $59.7 billion).

A net profit margin of 18.9% means that for every dollar generated by Apple in sales, the comಞpany kept $0.189 as profit.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Securities & Exchange Commission. "".

澳洲幸运5官方开奖结果体彩网