Finance
Gross profit margin
Helps managers answer: How much profit are we generating for each dollar in sales?
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Gross profit margin vs Net profit margin
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Finance
Net profit margin
Helps managers answer: How much profit are we generating for each dollar in sales?
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Use this when.
Determine how much gross profit the organisation retains from each dollar of sales.
Answer: “How much profit are we generating for each dollar in sales?”
Extracted signals
Strengths, limits, and pitfalls.
Gross profit margin
- Go below the corporate average. Comparing margins by business unit, department, product, channel or customer can reveal the economic drivers hidden by an aggregate result.
Watch for
- Do not confuse markup with margin. Gross profit margin uses selling price as its denominator; markup conventionally uses the seller’s cost.
Net profit margin
- Decompose the margin change and compare it with cash conversion, return on capital and reinvestment. A ratio becomes useful when its drivers are actionable.
Watch for
- Do not treat an old cross industry league table as a benchmark. Accounting choices, one offs, business models and economic cycles can make apparently similar margins incomparable.
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