# How to Calculate Profit Margin

There is one downfall with this strategy as it may backfire if customers become deterred by the higher price tag, in which case, XYZ loses both gross margin and market share. The gross profit of the retail business – the difference between revenue and COGS – is \$2 million here. When looking at your gross margin, benchmarking against averages in your industry gives you a more accurate picture of how you stack up relative to competitors. When you buy in bulk, you pay less on average per item, which further decreases expenses and increases the profit made on each sale. You can find the revenue and COGS numbers in a company’s financial statements. Suppose a retail business generated \$10 million in revenue, with \$8 million in COGS in the fiscal year ending 2023.

1. But this can be a delicate balancing act because if it sets its prices overly high, fewer customers may buy the product.
2. Profit margin can also be calculated on an after-tax basis, but before any debt payments are made.
3. Like the gross and net profit margins, the operating profit margin is expressed as a percentage by multiplying the result by 100.

But in an effort to make up for its loss in gross margin, XYZ counters by doubling its product price, as a method of bolstering revenue. The difference between the gross margin and net profit margin pertains to how relationship data can create operational success the type of expenses deducted from the profit metric. Since COGS were already taken into account, the remaining funds are available to be used to pay operating expenses (OpEx), interest expenses, and taxes.

The company’s bottom line is important for investors, creditors, and business decision-makers alike. This is the figure that is most likely to be reported in a company’s financial statements. Never increase efficiency at the expense of your customers, employees, or product quality. Determining a company’s gross margins for multiple reporting periods provides insight into whether the company’s operations are becoming more or less efficient. In order to calculate it, first subtract the cost of goods sold from the company’s revenue.

## Interpreting the Gross Profit Margin

It’s important to compare the gross profit margins of companies that are in the same industry. This way, you can determine which companies come out on top and which ones fall at the bottom. Gross profit is the total profit a company makes after deducting the cost of doing business. Put simply, gross profit is a company’s total sales or revenue minus its COGS. Gross profit margin, on the other hand, is the profit a company makes expressed as a percentage using the formula above.

Lately, she has been thinking of expanding her line of clothing, too. Profit margins for a startup are generally lower because the operation is brand new, and it typically takes a while for efficiencies to develop. Get instant access to video lessons taught by experienced investment bankers.

## Gross Profit Margin Is Variable

As such, it sheds light on how much money a company earns after factoring in production and sales costs. Margins are metrics that assess a company’s efficiency in converting sales to profits. Different types of margins, including operating margin and net profit margin, focus on separate stages and aspects of the business.

Profit margins are one of the simplest and most widely used financial ratios in corporate finance. A company’s profit is calculated at three levels on its income statement. This most basic is gross profit, while the most comprehensive is net profit. All three have corresponding profit margins calculated by dividing the profit figure by revenue and multiplying by 100.