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.
Unlock full access to Finance Train and see the entire library of member-only content and resources.