Gross Margin Meaning
Net sales less cost of goods sold (COGS) equals gross margin . In other words, it is the amount of money a firm keeps after deducting the actual expenses of creating the goods and services it sells.
The larger the gross margin, the more Cash a firm keeps, covering other expenses or repaying debt. Net sales are calculated by deducting gross income from returns, allowances, and discounts.
Gross Margin Formula
Gross Margin GM =Net Sales – COGS
Or
Gross Margin GM =Revenue – COGS
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difference between gross margin and net profit
Gross margin and net margin are profitability measures used to analyze a company’s financial health. Gross profit margin and net profit margin are both stated in percentage terms and quantify profitability as a proportion of sales for a given time.
Net profit = Net Sales – COGS – Expenses
another calculation to show relation between Gross and Net Profit:
Net Profit = Gross Margin – Expenses
- Profit margins compare revenues to expenses of goods sold to determine how effectively a firm can convert sales into profits.
- Gross profit margin is calculated by dividing net sales by net sales less cost of goods sold.
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To get at a more cautious number, the net profit margin subtracts the values of interest, taxes, and operational expenditures from net revenue.
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Gross Margin Equation in Income Statement
The gross profit margin is computed from Income statement by subtracting total revenue from total revenue and dividing the difference by total revenue. To represent the value as a percentage, the gross margin result is generally multiplied by 100. The cost of goods sold (COGS) is the amount it costs a firm to produce the goods or services it sells.
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