Gross Profit Margin vs. Net Profit Margin: What’s the Difference?

Reviewed by Julius MansaFact checked by Ryan EichlerReviewed by Julius MansaFact checked by Ryan Eichler

Gross Profit Margin vs. Net Profit Margin: An Overview

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

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

Gross profit margin is the profit remaining after subtracting the cost of goods sold (COGS) from revenue. It expresses the relationship of profit to revenue as a percentage. Net profit margin is the profit that remains after subtracting both the COGS and operating expenses from revenue.

While gross profit and gross margin are two measurements of profitability, net profit margin, which includes a company’s total expenses, is a far more definitive profitability metric, and the one most closely scrutinized by analysts and investors.

Here’s a more in-depth look at gross profit margin and net profit margin.

Key Takeaways:

• The gross profit margin is the percentage of revenue that exceeds the cost of goods sold.
• A high gross profit margin indicates that a company is successfully producing profit over and above its costs.
• The net profit margin is the ratio of net profits to revenues for a company; it reflects how much each dollar of revenue becomes a profit.

Gross Profit Margin

Gross profit margin is a measure of profitability that shows the percentage of revenue that exceeds the cost of goods sold (COGS). The gross profit margin reflects how successful a company’s executive management team is in generating revenue, considering the costs involved in producing its products and services. In short, the higher the number, the more efficient management is in generating profit for every dollar of the cost involved. 

The gross profit margin is calculated by taking total revenue minus the COGS and dividing the difference by total revenue. The gross margin result is typically multiplied by 100 to show the figure as a percentage. The COGS is the amount it costs a company to produce the goods or services that it sells. 

​Gross Profit Margin=Revenue(Revenue−COGS)​×100where:COGS=Cost of goods sold​

Example of Gross Profit Margin

For Q3 2024, Apple reported total sales or revenue of $85.8 billion and COGS of $46.1 billion, as shown in the company’s consolidated statement of operations below.

Apple’s gross profit margin for Q3 2024 was 46.3%. Using the formula above, it would be calculated as follows:

• ($85.8 billion – $46.1 billion) / $85.8 billion x 100 = 46.3%

This means that for every dollar Apple generated in sales, the company had 46.3 cents in gross profit before other business expenses were paid. 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 measurement.

Important

Operating margin is another metric that can assess a company’s financial health. It focuses on operating income, which takes into consideration profit after the cost of goods sold and administrative expenses have been subtracted from revenues.

Net Profit Margin

The net profit margin is the ratio of net profits to revenues for a company or business segment. Expressed as a percentage, the net profit margin shows how much of each dollar collected by a company as revenue translates to profit. 

Net profitability is an important distinction since revenue increases do not necessarily translate into increased profitability. Net profit is the gross profit (revenue minus COGS) minus operating expenses and all other expenses, such as taxes and interest paid on debt. Although it may appear more complicated, net profit is calculated for us and provided on the income statement as net income. 

​Net Profit Margin=Revenue(NI)×100​where:NI​=Net income=R − COGS − OE − O − I − T​R=RevenueOE=Operating expensesO=Other expensesI=InterestT=Taxes​

Example of Net Profit Margin 

Apple reported a net income number of roughly $21.4 billion for Q3 2024, as shown in its consolidated statement of operations below. As we saw earlier, Apple’s total sales or revenue was $85.8 billion for the same period.

Apple’s net profit margin for Q3 2024 was 24.9%. Using the formula above, we can calculate it as:

• $21.4 billion / $85.8 billion = 0.249
• 0.249 x 100 = 24.9%

A 24.9% net profit margin indicates that for every dollar generated by Apple in sales, the company kept 24.9 cents as profit. A higher profit margin is always desirable since it means the company generates more profits from its sales. 

However, profit margins can vary by industry. Growth companies might have a higher profit margin than retail companies, but retailers often make up for their lower profit margins with higher sales volumes.

It is possible for a company to have a negative net profit margin. A negative net profit margin occurs when a company has a loss for the quarter or year. That loss, however, may just be a temporary issue for the company. Reasons for losses could be increases in the cost of labor and raw materials, recessionary periods, and the introduction of disruptive technological tools that could affect the company’s bottom line.

Special Considerations

It is important to note the difference between gross profit margin and gross profit. Gross profit margin is shown as a percentage, while gross profit is an absolute dollar amount.  You can also view net income/net profit and net profit margin this way.

The gross profit is the absolute dollar amount of revenue that a company generates beyond its direct production costs. Thus, an alternate rendering of the gross margin equation becomes gross profit divided by total revenues. As shown in the statement above, Apple’s gross profit figure was $39.7 billion (or $85.8 billion minus $46.1 billion).

In short, gross profit is the total amount of gross profit after subtracting revenue from COGS—or $39.7 billion in the case of Apple. But the gross margin is the percentage of profit Apple generated per the cost of producing its goods, or 46.3%.   

The gross profit figure is of little analytical value because it is a number in isolation rather than a figure calculated in relation to both costs and revenue. Therefore, the gross profit margin (or gross margin) is more significant 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 appear impressive, but if the gross margin for the company is only 1%, then a mere 2% increase in production costs is sufficient to make the company lose money.

What’s the Difference Between Gross Profit and Gross Profit Margin?

Gross profit is the dollar amount of profits left over after subtracting the cost of goods sold from revenues. Gross profit margin shows the relationship of gross profit to revenue as a percentage.

What Is the Difference Between Net Profit and Net Profit Margin?

Net profit is the dollar figure that shows the profit that remains after subtracting the cost of goods sold, operating expenses, taxes, and interest on debt. Net profit margin is a percentage that shows net profit compared to revenue.

Which Is Better: Gross Profit Margin or Net Profit Margin?

While gross profit margin and net profit margin each provide valuable information, net profit margin is often the more useful metric, as it accounts for not only the cost of goods sold but also other operating expenses, which can affect overall profitability.

The Bottom Line

Investors and analysts typically use both gross profit margin and net profit margin to gauge how efficient a company’s management is in earning profits relative to the costs involved in producing their goods and services.

Net profit margin gives a more comprehensive picture of a company’s overall profitability as it also includes operating expenses, whereas gross profit margin does not. It is wise to compare the margins of companies within the same industry and over multiple periods to get a sense of any trends.

Read the original article on Investopedia.