- Income Statement
- Formats of Income Statements
- Principles of Revenue Recognition
- Revenue Recognition - Long-term Contracts
- Revenue Recognition - Instalment Sales
- Revenue Recognition - Barter Transactions
- Expense Recognition
- Inventory Expense Recognition
- Depreciation Expense Recognition
- Amortization Expense Recognition
- Bad Debt Expense and Warranty Expense Recognition
- Financial Reporting of Non-recurring Items
- Operating and Non-operating Components of Income Statement
- How to Calculate Basic Earnings Per Share (EPS)
- Impact of Stock Dividends and Stock Splits on Earnings Per Share (EPS)
- Diluted EPS
- Calculation of Diluted EPS (Convertible Preferred Stock)
- Calculation of Diluted EPS (Convertible Debt)
- Common Size Income Statement
- Performance Measures of a Company
- Comprehensive Income
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.
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