Gross Margin vs Net Margin Ft. Juice Wale Bhaiya #profit #revenue #margin #expenses #fruits #sale

Gross Margin vs Net Margin Ft. Juice Wale Bhaiya #profit #revenue #margin #expenses #fruits #sale

Difference Between Gross Margin vs Net Margin

Gross margin and net margin are key profitability ratios for measuring a company’s profits against the revenue over a period of time. Both gross profit margin and net margin are expressed in the form of percentage and measure profitability compared to the revenue for a set period. Furthermore, these ratios provide a glance at the company’s wellbeing.

Analysing ratios is a critical part of fundamental analysis of a company and its stocks. Each of these two metrics dispenses a specific aspect of an organization’s profitability and cost-management efficiency. Therefore, it is essential to understand the key and subtle details in gross margin vs net margin to ensure a sound application of the said metrics.

What is Gross Margin?

Gross margin, also known as gross profit margin, is a profitability metric that shows the share of total revenue that a company reports as gross profit. Essentially, this ratio shows how much gross profit a business makes against Re.1 of its total revenue. For instance, when a company’s gross margin is 80%, it earns Rs.0.8 gross profit against Re.1 of its total earnings.

What is Net Margin?

It is also called net profit margin since the metric is derived from the net profit of an organisation. Both gross margin and net margin are based on the total revenue generated by a business. The net margin represents the percentage of total revenue a company reports as net profit.

A critical point in the comparison is that the former is derived after only deducting the cost of goods sold (COGS) from total revenue. The latter, on the other hand, is computed after deducting all expenses and obligations from the total revenue. Resultantly, a company’s gross margin is always higher in comparison to its net margin.

How to Calculate Gross Margin?

In order to calculate gross margin, individuals need first to compute the gross profit. However, most companies list it out as a separate line item in their periodic income statements. Nevertheless, to calculate gross profit, the following items shall be subtracted from total revenue –

Raw materials consumed
Cost of labour
Production expenses
Inventory maintenance costs
Basically, all expenses directly related to the core operations of a business are regarded as gross margin. It is a critical point of difference between gross margin and net margin.

After the calculation of gross profit, its ratio can be calculated using the following formula –

Gross margin = (Gross profit / Total revenue) x 100

How to Calculate Net Margin?

Individuals need to calculate the net profit before deriving the net margin. However, similar to gross profit, net income is also a separate line item in a company’s typical income statement.

The items deducted from the total revenue to calculate net income are –

Cost of revenue
Depreciation
Administrative overhead
Interest on debt
Tax

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