Gross Profit vs. Gross Margin: What's the Difference?

Gross Profit vs. Gross Margin: An Overview

Gross profit and gross margin show the profitability of a company when comparing revenue to the costs involved in production. Both metrics are derived from a company's income statement and share similarities but show profitability in different ways.  

Gross profit refers to the amount of revenue remaining after subtracting the cost of goods sold (COGS). Gross margin, on the other hand, expresses gross profit as a percentage of total revenue.

Gross Profit

Gross profit refers to the money a company earns after subtracting the costs associated with producing and selling its products. Gross profit is represented as a whole dollar amount, showing the revenue earned after subtracting the costs of production.

Gross profit is calculated by: 

$\begin{aligned}&\text{Gross profit}=\text{Net sales}-COGS\\&\textbf{where:}\\&\text{Net sales}=\text{Equivalent to revenue, or the total amount}\\&\quad\qquad\quad\text{\ \ \ \ \ of money generated from sales for the period.}\\&\qquad\qquad\text{\ \ \ \ \ It can also be called net sales because it can}\\&\qquad\qquad\text{\ \ \ \ \ include discounts and deductions from return-}\\&\qquad\qquad\text{\ \ \ \ \ ed merchandise. Revenue is typically called}\\&\qquad\qquad\text{\ \ \ \ \ the top line because it sits on top of the in-}\\&\qquad\qquad\text{\ \ \ \ \ come statement. Costs are subtracted from}\\&\qquad\qquad\text{\ \ \ \ \ revenue to calculate net income or the bottom}\\&\qquad\qquad\text{\ \ \ \ \ line.}\\&COGS=\text{Cost of goods sold. The direct costs associated}\\&\qquad\qquad\text{\ \ with producing goods. Includes both direct la-}\\&\qquad\qquad\text{\ \ bor costs, and any costs of materials used in pro-} \\&\qquad\qquad\text{\ \ ducing or manufacturing a company's products.}\end{aligned}$​Gross profit=Net sales−COGSwhere:Net sales=Equivalent to revenue, or the total amount     of money generated from sales for the period.     It can also be called net sales because it can     include discounts and deductions from return-     ed merchandise. Revenue is typically called     the top line because it sits on top of the in-     come statement. Costs are subtracted from     revenue to calculate net income or the bottom     line.COGS=Cost of goods sold. The direct costs associated  with producing goods. Includes both direct la-  bor costs, and any costs of materials used in pro-  ducing or manufacturing a company’s products.​

Gross profit measures how well a company generates profit from its labor and direct materials. Some of the costs include:

• Direct materials
• Direct labor
• Equipment costs involved in production
• Utilities for the production facility
• Shipping costs
  

Gross Margin

Gross profit margin shows the percentage of revenue that exceeds a company's costs of goods sold. It illustrates how well a company is generating revenue from the costs involved in producing its products and services. The higher the margin, the more effective the company's management is in generating revenue for each dollar of cost. 


Gross profit margin is calculated by subtracting the cost of goods sold from total revenue for the period and dividing that number by revenue. 

$\text{Gross Profit Margin}=\frac{\text{Revenue}-\text{Cost of Goods Sold}}{\text{Revenue}}$Gross Profit Margin=RevenueRevenue−Cost of Goods Sold​

Gross Profit vs. Gross Margin Example

Let's consider Company XYZ's fiscal year-end results. Below are the key numbers for the example.

• Net sales or (total sales or revenue) = $250 billion 
• Cost of goods sold (cost of sales) = $145 billion
• Gross profit = $105 billion ($250 billion - $145 billion).

We can see that Company XYZ recorded a gross profit of $105 billion after subtracting COGS ($145 billion) from revenue ($250 billion).

To calculate the gross margin, we take gross profit and divide it by revenue: $105 billion / $250 billion = 0.42, or 42%.

Company XYZ earned 42 cents in gross profit when compared to its cost of goods sold. If a company's ratio is rising, it means the company is selling its inventory for a higher profit.

How Do You Calculate Gross Margin From Gross Profit?

To calculate gross margin, you divide gross profit by revenue. For example, if a company has revenue of $50 billion and a gross profit of $20 billion, then the gross margin would be $20 billion / $50 billion = 40%.

What Is a Good Gross Profit Margin?

What is considered a good gross profit margin will depend on the company and the industry it is in. Different industries have different requirements, so comparing companies in different industries can be inaccurate if only looking at one financial ratio. What is considered good for one industry may be bad for another industry. Generally, having a gross profit margin above 50% is good but it is important to compare apples to apples.

How Can a Company Improve Gross Profit Margin?

A company can improve its gross profit margin by increasing its prices but maintaining its costs. It can negotiate better costs of goods with suppliers in order to decrease the cost of goods sold. Improving efficiency can also help boost gross profit margin.

The Bottom Line

Gross profit and gross profit margin both provide good indications of a company's profitability based on their sales and costs of goods sold. However, the ratios are not a thorough measure of profitability since they don't include operating expenses, interest, and taxes.

Analysts and investors typically use multiple financial ratios to gauge how a company is performing. It's best to compare the ratios to companies within the same industry and over multiple periods to get a sense of any trends.