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. ### How do gross margin and profit margin differ?

Gross margin and profit margin are profitability ratios used in evaluating a company's financial health, but they have distinct ... Read Answer >>
2. ### What is considered a healthy operating profit margin?

An operating profit margin is a profitability ratio that investors use when evaluating a company. Comparing a company's margins ... Read Answer >>
3. ### Gross Margin vs Operating Margin: What the difference?

Understand the difference between gross margin and operating margin in relation to evaluating a company's overall profitability ... Read Answer >>
4. ### 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 >>
5. ### 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 >>
6. ### What is the difference between revenue and cost in gross margin?

Discover the differences between revenue and cost in gross margin, along with an explanation of various measures of profitability. 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.

### 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.
3. Managing Wealth

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

How to determine if the amount you clear dovetails with the competition.
4. Investing

### 3 Profit Metrics Every Investors Should Understand

In this article, you will understand how the three metrics gross profit, operating profit, and net profit helps investors see how a company is performing.
5. Investing

### Apple's 5 Most Profitable Lines of Business (AAPL)

Learn about how Apple generates its profits. It breaks its results by geographic region, with all showing year-over-year improvement.
6. Investing

### FireEye's 3 Key Financial Ratios (FEYE)

Learn about FireEye, Inc.'s financial ratios, such as gross margin, operating margin and quick ratio, that are helpful to understand the company's business.
7. Investing

### 6 Stocks to Outperform The Late Bull Market

Stocks with high and stable gross profit margins will outperform, says Goldman Sachs.
8. Investing

### Understanding the Income Statement

The best way to analyze a company - and figure out if it's worth investing in - is to know how to dissect its income statement. Here's how to do it.
RELATED TERMS
1. ### Gross Profit Margin

A gross profit margin is a financial metric used to assess financial ...
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 ...