Delving into profit margins: Do you know the difference between the three main types?

Julie Brownlee, Fsp Invest, 23 Sep. 2014

Tags: profit margins, profit margin, gross profit margin, net profit margin, operating profit margin,

When it comes to looking at the performance of a company, one thing you’ll be interested in is profits.

One of the best ways to do this is to look at profit margins. Profit margins shows you in a percentage how well the company’s done turning sales from the money it’s forked out on goods.

But there’s more than one type of profit margin to look at.

Read on to find out the differences between them…

What is a profit margin?

Profit margins tell you how much of a company’s sales (or revenue) is turned into profit. This figure is usually a percentage.

There are three main types of profit margin…

What different profit margins mean

Gross profit margin
The gross profit margin is a company’s gross profit divided by its sales. You can calculate the gross profit by taking away the costs of the goods sold from the amount they sold for (revenue).

For example, Company ABC has sales of R1 billion from goods that cost it R750 million. The gross profit is R250 million. That gives you a gross profit margin of 25%.

Operating profit margin
If you take away the operating expenses, you get the operating profit margin. The operating expenses are the costs of running the business.

Going back to our example, let’s say the operating expenses are R200 million. That gives you operating profits of R50 million. That’s an operating profit margin of 5%.

Net profit margin
To calculate the profit margin after tax, you need to remove the cost of tax paid to give you the net profit margin.

Let’s say for our example that after tax the net profits are R3.75 million. That gives you a net profit margin of 3.75%.

So there you have it, the three main types of profit margins you’ll come across.

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