Performance Measures of a Company

Two commonly used measures of profitability of a company include Gross Profit Margin and Net Profit Margin.

Gross Profit Margin

Gross Profit Margin = (Gross Profit) ÷ (Gross Sales)

Gross profit margin measures gross profit as a percentage of gross revenue. This helps capture profit as a percentage of revenue, and helps assess components that affect profitability.

Net Profit Margin

Net Profit Margin = (Net Profit) ÷ (Gross Sales)

When net profit or the bottom line, profit after subtracting all costs is shown as a percentage of gross sales we call it net profit margin. This margin varies from industry to industry. For example a 5-6% profit in the steel manufacturing industry is considered very good, but poor for the pharmaceutical industry. It also needs to be considered with that firm’s historical performance.