Gross Profit Margin Calculator
What is Gross Profit Margin?
Gross margin is the difference between revenue and cost of goods sold (COGS) divided by revenue.
Gross margin is expressed as a percentage. Generally, it is calculated as the selling price of an item, less the cost of goods sold (e.g. production or acquisition costs, not including indirect fixed costs like office expenses, rent, or administrative costs). Gross Margin is often used interchangeably with Gross Profit, but the terms are different. When speaking about a monetary amount, it is technically correct to use the term Gross Profit; when referring to a percentage or ratio, it is correct to use Gross Margin. In other words, Gross Margin is a percentage value, while Gross Profit is a monetary value.
Gross Margin is a type of profit margin, specifically a form of profit divided by net revenue: for example, gross (profit) margin; operating (profit) margin; net (profit) margin; etc.
Gross profit margin is a metric analysts use to assess a company's financial health by calculating the amount of money left over from product sales after subtracting the cost of goods sold (COGS). Sometimes referred to as the gross margin ratio, gross profit margin is frequently expressed as a percentage of sales
If a company's gross profit margin wildly fluctuates, this may signal poor management practices and/or inferior products. On the other hand, such fluctuations may be justified in cases where a company makes sweeping operational changes to its business model, in which case temporary volatility should be no cause for alarm.
A company's gross profit margin percentage is calculated by first subtracting the cost of goods sold (COGS) from the net sales (gross revenues minus returns, allowances, and discounts). This figure is then divided by net sales, to calculate the gross profit margin in percentage terms.
For example, if a company decides to automate certain supply chain functions, the initial investment may be high, but the cost of goods ultimately decreases due to the lower labor costs resulting from the introduction of the automation.
Product pricing adjustments may also influence gross margins. If a company sells its products at a premium, with all other things equal, it has a higher gross margin. But this can be a delicate balancing act because if a company sets its prices overly high, fewer customers may buy the product, and the company may consequently hemorrhage market share.
Analysts use gross profit margin to compare a company's business model with that of its competitors. For example, let us assume that Company ABC and Company XYZ both produce widgets with identical characteristics and similar levels of quality. If Company ABC finds a way to manufacture its product at 1/5 the cost, it will command a higher gross margin because of its reduced costs of goods sold, thereby giving ABC a competitive edge in the market. But then, in an effort to make up for its loss in gross margin, XYZ counters by doubling its product price, as a method of bolstering revenue.
Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings. As profit and earnings are used synonymously for income (also depending on UK and US usage), net earnings and net profit are commonly found as synonyms for net income. Often, the term income is substituted for net income, yet this is not preferred due to the possible ambiguity. Net income is informally called the bottom line because it is typically found on the last line of a company's income statement (a related term is top line, meaning revenue, which forms the first line of the account statement).
In simplistic terms, net profit is the money left over after paying all the expenses of an endeavor. In practice this can get very complex in large organizations. The bookkeeper or accountant must itemise and allocate revenues and expenses properly to the specific working scope and context in which the term is applied.
Net income is usually calculated per annum, for each fiscal year. The items deducted will typically include tax expense, financing expense (interest expense), and minority interest. Likewise, preferred stock dividends will be subtracted too, though they are not an expense. For a merchandising company, subtracted costs may be the cost of goods sold, sales discounts, and sales returns and allowances. For a product company, advertising, manufacturing, & design and development costs are included. Net income can also be calculated by adding a company's operating income to non-operating income and then subtracting off taxes.
The net profit margin percentage is a related ratio. This figure is calculated by dividing net profit by revenue or turnover, and it represents profitability, as a percentage.
For a firm, gross income (also gross profit, sales profit, or credit sales) is the difference between revenue and the cost of making a product or providing a service, before deducting overheads, payroll, taxation, and interest payments. This is different from operating profit (earnings before interest and taxes). Gross margin is often used interchangeably with Gross Profit, but the terms are different. When speaking about a monetary amount, it is technically correct to use the term Gross Profit; when referring to a percentage or ratio, it is correct to use Gross Margin. In other words, Gross Margin is a percentage value, while Gross Profit is a monetary value.
What is Income?
Individuals, corporations, members of partnerships, estates, trusts, and their beneficiaries ("taxpayers") are subject to income tax in the United States. The amount on which tax is computed, taxable income, equals gross income less allowable tax deductions.
The Internal Revenue Code gives specific examples. The examples are not all inclusive. The term "income" is not defined in the statute or regulations. An early Supreme Court case stated, "Income may be defined as the gain derived from capital, from labor, or from both combined, provided it is understood to include profit gained through a sale or conversion of capital assets." The Court also held that the amount of gross income on disposition of property is the proceeds less the basis (usually, the acquisition cost) of the property.
Gross income is not limited to cash received. "It includes income realized in any form, whether money, property, or services."