Difference between gross profit margin & net profit margin

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Difference between gross profit margin & net profit margin
Revenue margins are useful for assessing profitability and efficency. (financial report image by PaulPaladin from Fotolia.com)

Gross profit margin and net profit margin are computed from the revenues generated by a business and expressed as a percentage. The difference lies in what charges are applied to revenues before the calculations are made.

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Facts

Gross profit, as defined by "Investor Words," is "sales minus all costs directly related to those sales" including "manufacturing expenses, raw materials, labour, selling, marketing and other expenses"

Net profit is "the bottom line, calculated by subtracting a company's total expenses from total revenue, thus showing what the company has earned in a given period of time."

Margin calculation

Gross profit margin is computed by dividing gross profit by sales. Net profit margin is calculated by dividing net profit by net revenues.

Identification

Revenues, costs and expenses used to compute gross profit and net profit margins are found in a company's income statement.

Function

Gross profit and net profit margins are useful to investors comparing a company's current performance with past performance, or to make comparisons between companies in the same industry or sector.

Significance

The gross profit margin is a good general indicator of the overall efficiency of a company. The net profit margin is an indicator of relative profitability with respect to past performance and other similar businesses.

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