Loading the player...
A:

Gross profit margin and net profit margin are two separate profitability ratios used to assess a company's financial stability and overall health.

Profit margin is a percentage measurement of profit that expresses the amount a company earns per dollar of sales. Obviously, if a company makes more money per sale, it has a higher profit margin.

The gross profit margin shows total revenue minus the cost of goods (the amount it cost the company to produce the goods or services that it sold, commonly referred to as cost of goods sold, or COGS). The calculation to arrive at gross profit margin is:

Gross profit margin = (Revenue - Cost of Goods) ÷ Revenue = Gross Profit ÷ Revenue

For the year ended December 31, 2016, Dunkin' Brands Group, Inc. (DNKN), the holding company of Dunkin' Donuts and Baskin-Robbins, reported a total revenue of $828.89 million and COGS of $148.61 million. DNKN's gross profit margin is:

($828.89 - $148.61) ÷ $828.89 = 82.07%

This means that for every dollar DNKN generates in sales, $0.18 is used to cover the cost of inventory, and $0.82 is available to cover basic operating expenses. A higher ratio is usually preferred as this would indicate that the company 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 indication.

The net profit margin is a more accurate measure of a company's profitability, as it reveals the percentage of revenue that actually reflects a company's profit per dollar of sales. Net profitability is an important distinction, since increases in revenue do not necessarily translate into actual increased profitability. Net profit is the gross profit (revenue minus cost of goods) minus operating expenses and all other expenses, such as taxes and interest paid on debt. The formula for net profit margin is as follows:

Net profit margin = (revenue - cost of goods - operating expenses - other expenses - interest - taxes) ÷ revenue = Net Income ÷ Revenue

DNKN's net profit margin for the fiscal year ended December 31, 2016 is:

$195.58 million ÷ $828.89 = 23.60%

A 23.60% net profit margin indicates that for every dollar generated by DNKN in sales, the company keeps $0.24 as profit. It is also possible for a company to have a negative net profit margin. A negative net profit margin occurs when a company makes a loss for the quarter or year and could be a temporary issue for the company. Reasons for losses could be increases in the cost of labor and raw materials, recessionary periods, and introduction of disruptive technological tools that could affect the company's bottom line.

Examining its net profit margin can help a company gain a much clearer picture of its overall expenses compared to revenue. It is often much easier for a company to increase its profitability by reducing costs than by increasing sales, especially if the company operates in a very competitive market.

RELATED FAQS
  1. What is the formula for calculating profit margins?

    Learn about gross, operating and net profit margins, how each is calculated and how they are used by businesses and investors ... Read Answer >>
  2. What is the difference between gross margin and profit margin?

    Understand the difference between gross margin and profit margin, and learn about the profitability ratios used in evaluating ... Read Answer >>
  3. What is the difference between gross profit margin and operating profit margin?

    Understand the difference between gross profit margin and operating profit margin, two measures of corporate profitability ... Read Answer >>
  4. What costs are not counted in gross profit margin?

    Explore the various measures of a company's profitability, such as gross, operating and net profit margins, and understand ... Read Answer >>
  5. Should I look at a company's operating profit or net profit?

    Explore the ways in which investors and market analysts use a company's operating profit and net profit margins for equity ... Read Answer >>
  6. What's the difference between profit margin and operating margin?

    Find out the differences between a company's gross profit margin, net profit margin and operating margin, and what each metric ... Read Answer >>
Related Articles
  1. Investing

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  2. Investing

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  3. Managing Wealth

    What’s a Good Profit Margin for a New Business?

    Surprisingly, the younger your company is, the better its numbers may look.
  4. Investing

    Gross, Operating and Net Profit Margins

    A company’s income statement includes the company’s gross, operating and net profits.
  5. Investing

    Contribution Margin

    Contribution margin is a cost accounting concept that allows a company to determine the profitability of individual products.
  6. Investing

    Understanding Profit Metrics: Gross, Operating and Net Profits

    Rather than relying solely on net profit figures to evaluate a company's performance, seasoned investors will often look at gross profit and operating profit as well.
  7. Investing

    Is Net Income The Same As Profit?

    Net income and profit both deal with positive cash flow, but there are important differences between the two concepts.
  8. Investing

    Profit Metrics: Gross, Operating & Net Profits

    In addition to net profit, most analysts look at a company’s gross profit and operating profit to gauge performance.
  9. Investing

    4 Tips to Evaluate Growth Companies (KO, AAPL)

    Discover the best metrics for stock investors to utilize when selecting and evaluating the best opportunities in growth investing.
RELATED TERMS
  1. Profit Margin

    Profit margin is part of a category of profitability ratios calculated ...
  2. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company ...
  3. Gross Margin

    A company's total sales revenue minus its cost of goods sold, ...
  4. Gross Profit

    A company's total revenue (equivalent to total sales) minus the ...
  5. After-Tax Profit Margin

    A financial performance ratio, calculated by dividing net income ...
  6. Marginal Profit

    Marginal profit is the profit earned by a firm or individual ...
Hot Definitions
  1. Aggregate Demand

    The total amount of goods and services demanded in the economy at a given overall price level and in a given time period.
  2. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  3. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
  4. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  5. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
  6. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
Trading Center