- A company's total gross, or gross profit, may be found near the top of its income statement. Total gross is calculated by subtracting the cost of goods sold from all sales the company made during the period represented by the statement. Cost of goods sold represents the cost of buying or making the products the company sold, but it does not include other expenses, such as employee salaries and overhead.
- A company's total earnings is more commonly referred to as its net income. Net income is found at the bottom of the income statement. To arrive at net income, operating costs, including sales commissions, salaries, overhead and other expenses, are deducted from gross profit, giving you the company's total operating income. If the company has any income that did not come from sales, such as interest earned on investments, that money is added to operating income, giving you the company's net income amount.
- Calculating a company's net margin can offer a better way to measure its profitability than merely measuring its total and gross earnings. Net margin is calculated by dividing net income by total sales. This tells you what percentage of profit the company actually makes for each dollar of goods and services it sells. For example, if a company's net margin is 10 percent, it means it averages a 10 percent profit on every sale it makes.
- Company profits are relative. For example, it costs a lot more money for a car manufacturer to build cars than it costs a software company to build computer programs. As a result, net margins for car companies are much lower than net margins for software developers. If you are making company comparisons, it is important to compare margins of companies in the same industry to make a fair comparison.
Gross Profit
Total Earnings
Net Margin
Making Comparisons
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