Blog Posts, CFO

The Difference Between Gross Margin and Profit Margin

Updated: December 27, 2022

Profits are one of the most critical financial metrics that business owners focus on. In very simple terms, if your business is generating profits, then all must be well. But the reality is that there is more nuance to what profit means. One nuance is that there are different types of profits. The main one that will be covered in this article is the difference between gross margin and profit margin.

It’s no secret that financial management can get a little complicated at times. But knowing your financial terms and what story they are telling you is one of the most crucial parts of running a successful organization.

Two of the most critical concepts to understand are gross margin and net profit margin.

However, many business owners aren’t completely clear on what these terms mean and how they’re used.

Let’s take a closer look to help you understand everything you need to know.

Net Profit Margin

The first thing you should understand about both of these concepts is that “margins” usually refer to percentages.

When evaluating or calculating a company’s margins, you’ll usually start by looking at the organization’s net profit or net income.

In the simplest terms, net profit or net income is calculated as revenue minus operating expenses.

Net profit or Net income margin can then be found by dividing net profit by revenue. This is how you get the percentage.


Let’s look at Apple’s recent financial statements to calculate its net profit margin.

In 2021, Apple’s revenue was $365 billion with a net income of $95 billion. Dividing net income by revenue gives a 26% net profit margin. In other words, for every dollar of revenue Apple received, 26 cents of it was corporate profit.

At the same time, Google’s revenue was $257.6 billion with a net income of $76 billion. Dividing net income by revenue gives a 30% net profit margin. In other words, for every dollar of revenue Google received, 30 cents of it was corporate profit.

Therefore, you can see that Google was more efficient at generating a profit. And this efficiency is at the core of why calculating margin is useful. it is possible for businesses to generate a large number of sales but reflect a low amount of profit. In other words, they just break even. This is an overly simplified view, as profits can be impacted by different accounting strategies. But at their core, they are a good indicator of how efficient your organization is at making money.

Gross Profit

Gross profit is a similar concept with some important distinctions. To calculate gross profit, you take a company’s revenue and subtract the expenses used to generate that revenue. This differs from net profit in that you’ll only deduct expenses directly related to creating the revenue, as opposed to all of the organization’s expenses. It does not take into consideration taxes or interest from loans.

The exact expenses that should be considered as helping generate revenue will vary from company to company and industry to industry. Variable costs are a reality since the costs of goods or human resource overhead is in constant change.

For example, businesses that sell a physical product can deduct the cost of goods sold, while service companies can deduct their payroll expenses.

Why is Gross Profit Important?

Gross profit is one of the best gauges of the overall financial health of a business. A sizeable gross profit means that not only are your direct business costs low, but you also have money left over to cover other expenses.

Conversely, a smaller gross profit may be a sign of an inefficient business or one that needs to manage more carefully how it generates revenue and spends money. Gross profit is one of several key metrics that reflect your operational efficiency.


Let’s look at two businesses – Company A and Company B.

Company A has $1,000 in sales and spends $500 on the cost of goods sold (COGS), resulting in a gross profit of $500.

Company B also has sales of $1,000 but a COGS of $800. This gives Company B a gross profit of $200.

Obviously, most investors would prefer to be involved with Company A since it’s making more gross profit on the same amount of sales. Also, it would let business owners understand where they need to focus their attention. In this scenario, focusing on decreasing operating costs and overhead costs could be a more efficient strategy than increasing sales. Whatever the case, you can always go back to your gross margin and compare the impact of your strategic decisions.

Gross Profit Margin

Now that you understand gross profit, you can easily calculate and understand gross profit margin.

It’s expressed as a percentage and calculated by dividing gross profit by revenue. Like net profit margin, it gives insight into the efficiency of how an organization makes money.


Returning to our earlier examples, let’s look at Apple and Google.

Apple reported a gross margin of roughly $152 billion and revenue of $365 billion. This translates to an approximately 42% gross profit margin (GPM.)

At the same time, Google has a 57% gross profit margin.

Therefore, Google’s higher gross profit margin suggests it’s better than Apple at creating profit from its business operations. You could assume that one company has higher a higher administrative expense than the other. Or that the sale price of their products is more effective at creating profits.

Spotting Net and Gross Profit Margin on Your Financial Statements

Financial statements can be a bit difficult to navigate. They have a lot of information, so if you are still getting used to analyzing financial statements, here are a few tips:

  • If you’re looking for net profit, you’ll typically find it at the bottom of a profit and loss statement. This is why it’s also commonly referred to as “the bottom line.”
  • If you’re looking for gross profit, you’ll typically find it in the middle of a profit and loss statement.

This simple rule of thumb can save you quite a bit of time searching statements for the information you need!

Need Extra Help Spotting the Difference?

Understanding and calculating gross profit margin and net profit margin are fairly straightforward once you learn the difference between them.

However, taking that information and putting it into context so it can be actionable is a challenge. This is why working with a trusted accounting partner like Vertical CPA can give you the edge that your business needs to grow.

Our experienced professionals can walk you through your numbers and find strategies to boost gross profit margins and other key metrics. Contact us today to learn more!

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