Gross profit margin and net profit margin are two separate margins are used to assess the financial stability of the company and overall health.
Profit margin is a percentage of the estimated profits, which expresses the amount a company earns on each dollar of sales. If the company makes more money per sale, it has a higher profit.
Gross Profit Margin
Gross profit margin is a profitability ratio, where it shows the percentage of revenue that exceeds the cost of goods sold. This shows how successful the Executive management of the company is the income from the expenses involved in producing your products and services. In short, the higher the number, the more efficient the management in generating profit on every dollar of labor cost.
The gross profit margin is calculated as revenue minus the cost of goods sold. Cogs is the amount the company produce goods or services that it sells.
Formula gross profit
Example of gross profit
For the fiscal year ending September 30, 2017, by Apple. (Shares aapl) announced that total sales or revenue of $229 billion and cogs 141 billion. as shown from their consolidated report below 10K.
Gross profit of Apple in 2017 were:
($229 – $141) ÷ $229 = 38%
This means that for every dollar Apple generate sales of this company amounted to 38 cents gross profit before other business expenses were paid. A higher ratio is usually preferable, as it would mean that the company is selling stock for higher profits. Gross profit margin gives an idea about the profitability of the company, but it is not an accurate measurement.
Gross profit compared to gross profit
It is important to note the difference between the terms gross profit and gross profit. Gross margin, as a rule, is called the gross profit percentage as gross profit is the absolute amount in dollars.
Gross profit is the absolute dollar amount of revenue that the company generates outside of its direct production costs. Thus, an alternative rendering of the gross margin equation becomes the gross profit divided by total revenues. Shown in the statement above, gross profit of Apple, the figure was $88 billion (or $229B – $141B).
In short, the gross profit is the total amount of gross profit after subtracting revenue from cogs or $88B in the case of Apple, but the gross margin is the percentage of Apple’s profits, generated for the production costs of their products or 38%.
The gross profit figure is of little analytical purposes, since it represents the Number in isolation, and not rendering the values calculated in relation to expenditures and revenues. Thus, gross profit (or gross margin) is more important for market analysts and investors.
To illustrate the difference, consider a company showing a gross profit of $ 1 million. At first glance, the profit figure may look impressive, but if gross margin is only 1%, only 2% increase in the cost of production is quite sufficient to make the company lose money.
Gross profit and gross margin only two measurements of profitability. As we discuss below, net profit margin, which includes the company, the total expenditure is a much more unambiguous profitability indicator, and one of the most carefully watched by analysts and investors.
Net Profit Margin
Net income margin is the ratio of net profits to revenues for a company or business segment. Expressed as percentages, net profit shows how much of each dollar collected by the company and the company takes the profit.
Net profitability is an important feature because the increase in income does not necessarily lead to increased profitability. Net profit is gross profit (revenue minus cost of goods) minus operating expenses and all other expenses, such as taxes and interest paid on debt obligations. Although it may seem more complex, the net profit is calculated for US and shown in the statement of profit and loss account as net income.
The formula of net profit
Example of net profit
Apple reported net income of approximately $ 48 billion (in blue) for the financial year ended 30 September 2017, as is evident from their consolidated report below 10K. And we saw earlier, total sales or Apple’s revenue for the same period of 229 billion.
Apple’s net profit for 2017:
$48 billion ÷ $229 billion = 21%
21% net profit margin shows that for every dollar created by Apple in sales, the company maintained 0.21 $as profit. High profit is always desirable because it means that the company generates more profits from sales.
However, profits may vary depending on the industry. Growth companies may have a higher margin than retailers, and retailers to compensate for their low profit margins with increasing sales.
It is important to note that it is possible for a company to have negative net profit. Negative net profit margin takes place when the company has a net loss for the quarter or year, but the loss may be a temporary problem for the company. Causes of loss can be increase the cost of labor and raw materials crisis periods and the introduction of advanced technological tools that could affect the bottom line of the company.
Investors and analysts typically use as a profit margin and net profit margin to assess how effectively the management of the company in profits against the costs involved in the production of their goods and services. It is better to compare companies in the same industry and over several periods to understand trends.