Gross margin vs net profit margin
Gross margin is gross profit over sales. Net profit margin is net income over sales. On the wholesale sheet, $700,000 over $2,000,000 is 35 percent. On the DuPont sheet, $45,000 over $500,000 is 9 percent. They are different firms and different lines.
| Gross margin | Net profit margin | |
|---|---|---|
| Formula | Revenue minus cost of goods, over revenue. | Net income over sales. |
| Teaching sheet | $700,000 of gross profit on $2,000,000 of sales is 35 percent. | $45,000 of net income on $500,000 of sales is 9 percent. |
| Where it stops | After cost of goods. Operating costs, interest and tax sit below. | After interest and tax. It is the residual share. |
| What a wider reading can mean | A software-shaped cost of goods, 85 percent on the same $2,000,000 of sales. | A 15 percent margin on slower 0.5 turnover, which still prints a 10 percent ROE. |
| What it is not | Earnings. A firm at 85 percent gross margin can lose money below the line. | Gross margin. A 9 percent net margin is not a 9 percent gross margin. |
| When you would pick it | What share of each sale survives its direct cost. | What share of each sale survives as residual profit. |
On this page
Two lines, two firms
The 35 percent is a wholesale income statement on the business ratios calculator. The 9 percent is the first DuPont sheet on a different firm: $45,000 of net income, $500,000 of sales, $800,000 of assets. How gross margin works owns the 35 percent. How net profit margin works owns the 9 percent.
Pasting the 35 percent onto the DuPont sheet, or the 9 percent onto the wholesale sheet, is how a cost-of-goods fact gets read as a residual fact.
Gross margin against contribution margin is a third object, the per-unit planning identity. Return on equity is what the 9 percent becomes after turnover and the multiplier.
A wider gross margin is not a wider net margin
The software-shaped wholesale copy prints 85 percent gross margin on the same $2,000,000 of sales. That is still not a net margin until you have taken everything below the line off. The second DuPont sheet prints a 15 percent net margin and a 10 percent ROE, below the first sheet's 9 percent net margin and 15 percent ROE. Margin is a share. ROE is a product. This is educational material, not financial advice.
Worked examples
35 percent on the wholesale sheet
Sales $2,000,000, cost of goods $1,300,000. What is gross margin?
- Gross profit $700,000.
- Gross margin 35 percent.
Gross profit is $700,000, a 35 percent margin on $2,000,000 of sales.
9 percent on the DuPont sheet
Net income $45,000, sales $500,000. What is net margin?
- Net margin 9 percent.
- This is a different firm from the $2,000,000 wholesale sheet.
Net margin is 9 percent on $45,000 over $500,000. It is not the 35 percent gross margin.
Common questions
Are these the same company?
No. The 35 percent is a wholesale income statement. The 9 percent is the DuPont teaching sheet. This page puts them side by side so the formulas are not mashed.
Which one goes into DuPont?
Net margin. DuPont is net income over sales, times turnover, times the equity multiplier.
Is 35 percent or 9 percent a target?
They are teaching-sheet readings. This is educational material, not financial advice.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.