A:

Gross profit margin and operating profit margin are two metrics used to measure a company's profitability. The difference between them is that gross profit margin only figures in the direct costs involved in production, while operating profit margin includes operating expenses like overhead. Both metrics are important in assessing the financial health of a company.

Gross Profit Margin

Gross profit margin shows the percentage of revenue after subtracting the cost of goods sold involved in production. The cost of goods sold is the amount it costs a company to produce the goods or services that it sells. Gross margin shows how well a company generates revenue from the direct costs like direct labor and direct materials involved in producing their products and services. 

Gross profit margin is calculated by taking total revenue and subtracting the cost of goods sold. The difference is divided by total revenue. You can multiply the result by 100 since gross margin is typically shown as a percentage. 

Operating Profit Margin

Operating profit is located further down the income statement and is derived from its predecessor, gross profit. Operating profit or operating income takes gross profit and subtracts all overhead, administrative, and operational expenses. Operating expenses include rent, utilities, payroll, employee benefits, and insurance premiums. Operating profit includes all operating costs except interest on debt and the company's taxes.

Operating profit margin is calculated by taking operating income and dividing it by total revenue. Like gross profit margin, operating profit margin can be expressed as a percentage by multiplying the result by 100 as shown below. 

Comparing Gross Profit Margin and Operating Profit Margin

Below is a portion of the income statement for JC Penney Company Inc. (JCP) as of May 5, 2018.

  • Total revenue is highlighted in green for the amount of $2.67 billion while the COGS is beneath revenue coming in at $1.7 billion. 
  • Gross profit margin was 36% OR ($2.67 - $1.7 COGS)/ 2.67 = .36 X 100 = 36%.
  • Operating income, which is further down the statement, totaled $3 million for the period and is further down the statement, highlighted in blue.
  • Operating profit margin was .11% ($3 million/$2.67 billion) = .0011 X 100 = .11%
  • Although JC Penney had a 36% gross profit margin, after taking out operating expenses and overhead, listed as selling, general, and administrative (SG&A), the company earned less than 1% in operating profit margin.

The Bottom Line

JC Penney earned only $3 million in operating income after earning $2.67 billion in revenue. Although gross profit margin appeared healthy at 38%, after taking out expenses and SG&A, operating profit margin tells a different story. The disparity between the numbers shows the importance of using multiple financial metrics in analyzing the profitability of a company.

Gross profit margin (gross margin) and operating profit margin are both used to determine how well a company's management is generating profits. It's helpful to compare the profit margins over multiple periods and with companies within the same industry. For more on profit margins, please read "What Is Considered a Healthy Operating Profit Margin?"

RELATED FAQS
  1. Profit margin versus operating margin: What's the difference?

    There are some distinctions between profit margin and operating margin. Both measure efficiency of a firm, but one takes ... Read Answer >>
  2. How do gross margin and contribution margin differ?

    Gross margin and the contribution margin are metrics used to measure profitability, but each uses a different method. Read Answer >>
  3. How do gross profit and net income differ?

    Net income and gross profit are metrics that measure the profitability of a company and have different characteristics that ... Read Answer >>
  4. How can a company have a negative gross profit margin?

    There are several reasons why a company might experience a loss in gross margins, including poor marketing, ineffective pricing ... Read Answer >>
  5. What is the formula for calculating gross profit margin in Excel?

    Understand the basics of the gross profit margin including its interpretation as a measure of profitability and its calculation ... 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. 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.
  4. Investing

    Profitability Indicator Ratios

    Learn about profit margin analysis, effective tax rate, return on assets, return on equity and return on capital employed.
  5. Investing

    Analyzing Operating Margins

    Learn how to analyze operating margins and how to put this aspect of equity analysis to work.
  6. Investing

    The Gross Margin

    A business's "gross margin" is a rough gauge of how profitable its operations are. It measures how much sales revenue the company retains after all of the direct costs associated with making ...
  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

    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 a profitability ratios calculated as net income ...
  2. Profit

    Profit is the financial benefit realized when the amount of revenue ...
  3. Operating Margin

    Operating margin is a measure of a company's profitability, and ...
  4. Net Profit Margin

    Net profit margin, or net margin, is equal to net income or profits ...
  5. Operating Profit

    Operating profit is the profit from a firm's core business operations, ...
  6. Gross Income

    Gross income is the total income from all sources before deductions ...
Trading Center