Next video:
Loading the player...

To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue. If a company sells goods for $100 and pays $70 to produce those goods, the company’s gross profit margin is 30%.

To calculate net profit margin, take the gross profit and subtract operating and all other expenses, such as taxes and interest paid on debt. Then divide by revenue. If the same company has operating expenses, taxes and interest totaling $20, its net profit margin is 10%.

While gross profit margin provides a general indication of profitability, net profit margin is a more accurate measure. Increases in revenue do not necessarily create increases in profitability. Net profit margin reveals the percentage of revenue that reflects a company’s profit per dollar of sales.

Investors use both ratios to assess a company’s financial health. But net profit margins paint a clearer picture of the overall expenses compared to revenue. Often, companies find it easier to increase profits by reducing costs rather than increasing sales. 

  1. No results found.
Related Articles
  1. Investing

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  2. Investing

    Gross, Operating and Net Profit Margins

    A company’s income statement includes the company’s gross, operating and net profits.
  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. Small Business

    How Gross Margin Can Make or Break Your Startup

    Find out how your startup's gross margin can impact your business, including why a mediocre margin may spell disaster for a budding business.
  5. 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.
  6. Investing

    Gross Profit

    Gross Profit is one of several important measurements of a company's profitability.
  7. Managing Wealth

    What's a Good Profit Margin for a Mature Business?

    How to determine if the amount you clear dovetails with the competition.
  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.
Hot Definitions
  1. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  2. Acid-Test Ratio

    A stringent indicator that indicates whether a firm has sufficient short-term assets to cover its immediate liabilities. ...
  3. Floating Exchange Rate

    A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that ...
  4. Taxes

    An involuntary fee levied on corporations or individuals that is enforced by a level of government in order to finance government ...
  5. Impaired Asset

    A company's asset that is worth less on the market than the value listed on the company's balance sheet. This will result ...
  6. Solvency Ratio

    One of many ratios used to measure a company's ability to meet long-term obligations. The solvency ratio measures the size ...
Trading Center