Gross Profit x Net Profit: What's the difference? (2023)

Gross Profit x Net Profit: An Overview

Two important profitability metrics for any business are:gross profitmiliquid result. Gross profit represents the income or profit that remains after the cost of production has been deducted from income.revenueIt is the amount of revenue generated by the sale of a company's goods and services. Gross profit helps investors determine how much profit a business makes from producing and selling its goods and services. Gross profit is sometimes calledgross income.

On the other hand, net profit is the profit that remains after all expenses and costs have been deducted from income. Net income or net income helps investors determine a company's overall profitability, which reflects how effectively a business has been run.

Understanding the differences between gross profit and net profit can help investors determine if a company is making a profit, and if not, where it is losing money.

gross profit

Gross profit, operating profit, and net profit refer to the profit that a company generates. However, each represents gains at different stages of the production and performance process.

Gross profit is the profit a company makes after deducting the costs of manufacturing and selling its products.cost of goods sold(COG). Gross profit tells you how efficiently a business manages its production costs, such as labor and materials, to generate revenue from the sale of its goods and services. A company's gross profit is calculated by subtracting the cost of goods sold frompayment periodof your total income.

revenue

Revenue is the total amount raised through sales during a specified period of time, for example. B. a fourth, was won. Sales are sometimes reported as net sales, since they may include discounts and deductions for returned or damaged merchandise. For example, companies in the retail industry often report net sales as sales. Goods returned by your customers are deducted from your sales total. Sales are often called the "top line" because they are at the top of sales.admission Test.

Cost of Goods Sold (COGS)

Cost of goods sold refers to the direct costs involved in producing a company's goods. The CPV generally includes the following:

• Direct materials such as raw materials and inventory.
• Direct labor, such as wages for production workers.
• Costs of equipment used in production.
• Equipment repair costs
• manufacturing factory profits
• Shipment

We can see from the COGS items listed above that gross profit mainly includesvariable costs– or costs that fluctuate depending on production. Gross profit generally does not includefixed costs, that is, costs incurred regardless of production. Fixed costs may include headquarters salaries, rent, and insurance.

However, some companies may allocate a portion of their fixed costs used in production and report them on a per-unit basis, calledabsorption costs. For example, suppose a factory produces 5,000 cars in a quarter and the company pays $15,000 in rent for the building. In the absorption calculation, each car produced would cost $3.

How to Calculate Gross Profit

Gross profit is calculated by subtracting the cost of goods sold from a company's net sales or revenue, as shown below:

liquid result

the net profit isequivalent to the profit of a companyfor the billing period. In other words, net income includes all costs and expenses incurred by a business that are subtracted from income. Net income is often referred to asfinal resultdue to its location at the bottom of the income statement.

While many items can appear on a company's income statement, depending on the company's line of business, net income is typically found by subtracting the following expenses from revenue:

• operational expenses
• Interest on debts and loans
• overload orSelling, general and administrative expenses(General and adminsitrative expenses)
• income tax
• depreciation, that is, H. the allocation of costs of fixed assets, for example. B. team, in yourlifespanor life expectancy

Net income also includes additional sources of income. For example, companies often invest their money in short-term investments, which are considered a form of income. The proceeds from the sale of assets is also considered income.

How to calculate net profit

As mentioned above, net income is the result of subtracting all expenses and costs from income and adding income from other sources. Depending on the industry, a company may have multiple sources of income, in addition to income and various types of expenses. Some of these revenue or cost streams may be presented as separate items in the income statement.

For example, a company in the manufacturing sector would likely have COGS, while a company in the service sector would not have COGS, but their costs could be listed as operating expenses.

The general formula for net income can be expressed as follows:

• liquid result= Total income - Total expenses

A more detailed formula could be expressed as follows:

• liquid result= Gross Profit - Operating Expenses - Other Operating Expenses - Taxes - Debt Interest + Other Income

net income example

Let's say a company had sales of $1 million and had the following costs and other income:

• Cost of goods sold of $600,000
• Operating expenses of $200,000
• $10,000 in debt payments
• $5,000 tax payments
• Interest income of $8,000

Net income would be $193,000 ($1,000,000 - $600,000 - $200,000 - $10,000 - $5,000 + $8,000).

Main differences

Gross profit assesses a company's ability to generate profit while controlling its production and labor costs. As a result, it's an important metric for determining why a company's profits are rising or falling by looking at sales, production costs, labor costs, and productivity. When a company reports an increase in sales, but this is offset by an increase in production costs, such as B. labor costs, more than offset, gross profit for that period is lower.

For example, if a business hires too few production workers for the peak season, this would result in higher overtime pay for existing workers. The result would be higher labor costs and an erosion of gross profitability. However, using gross profit as a measure of overall profitability would be incomplete, since it does not include all the other costs involved in running a successful business.

On the other hand, net income represents the income from all aspects of a company's operations, as a result, net income is broader than gross income and can provide insight into the effectiveness of the management team.

For example, a company can increase its gross profit and, at the same time, treat its debt poorly by borrowing too much. the extrainterest expensesDebt service may result in reduced net income despite successful sales and production efforts.

Restrictions on gross profit and net profit

Gross profit may have its limits as it does not apply to all companies and industries. For example, a service business would probably have neither a cost of production nor a cost of goods sold. While net income is the most comprehensive measure of a company's profit, it too has limitations and can be misleading. For example, if a company sells a building, the money from the sale of the asset would increase net income for that period. Investors looking only at net income may misinterpret a company's profitability as increased sales of its products and services.

Operating Profit, Gross Profit and Net Profit

It's important to note that gross profit and net profit are just two of the profitability metrics available to determine a company's performance. For example,operational resultis the profit of a company before interest andLeadsubtracted, which is why it is also known as EBIT or earnings before interest and taxes.

However, when calculating operating profit, the company's operating expenses are subtracted from gross profit. Operating costs includedthe overloadCosts, such as salaries for corporate headquarters. Asgross profit, operating profitmeasures profitability by taking part or part of a company's income statement, while net income includes all components of the income statement.

Example of gross profit x net profit

Retail giant J.C. Penney was one of many retailers that have struggled financially in recent years. Below is a comparison of the company's gross profit and net profit for 2017 and an update for 2020.

2017

JC Penney reported the following income statement for 2017 in its 10K financial statements:

• Sales and Net Sales: $12.50 billion
• gross profit: $4.33 billion or (total sales $12.50 billion - COGS $8.17 billion)
• liquid result:loss of $116 million

Although J.C. Penney had a gross profit of $4.33 billion that year, the company actually suffered a loss of $116 million after deducting its remaining expenses, which include selling, general and administrative (SG&A) expenses and the cost of interest on its debt. - dollar. This real-life example shows why it is important to analyze a company's financial statements using various metrics to accurately determine whether the company is doing well or suffering losses.

2020

JC Penney continues to fight. In the third quarter of 2020, the company reported total revenue of $1.758 billion and cost of sales of $1.178 billion, meaning gross profit was $580 million.

However, the company posted a net loss of $368 million. althoughrecessionAfter the coronavirus outbreak affected many retailers in 2020, J.C. Penney posted a net loss of $93 million in the same quarter of 2019.

Although the company generated gross profit and positive income, J.C. Penney, as debt costs and interest can wipe out gross profit and result in a net loss or negative net income.

the end turned out

Gross profit, or gross receipts, is an important profitability metric because it shows how much profit is left over from sales after deducting the cost of production. Gross profit helps show the efficiency of a company in generating profit from the production of its goods and services.

Net income, on the other hand, represents the income or profit that remains after subtracting all expenses from income, including all other sources of income, such as revenue. B. Receipts for the sale of an asset are included. Both gross profit and net profit are important, but they show the profitability of a business at different stages.

Other profitability metrics are also used. For example,net profit marginIt is calculated by dividing net income by sales and multiplying the result by 100 to obtain a percentage. The net profit margin shows the percentage of profit generated for each dollar of sales. Similar,gross profit marginIt is calculated by dividing gross receipts by sales and multiplying the result by 100.

Bothgross margin and net profit marginThey are popular profitability metrics used by investors and analysts when comparing the level of profitability of one company to another. The term benefit is also used to calculatecapital leases(return). ROI represents the profit earned after subtracting the original cost from the market value, dividing by the original cost, and multiplying the result by 100.

While net income is considered the gold standard for profitability, some investors use other metrics, such as B. Earnings Before Interest and Taxes (EBIT). EBIT is important because it reflects a company's profitability without borrowing costs or taxes that would normally be included in net income.

When an investor wants to know if a company is improving its sales and cost control, EBIT helps to eliminate some of the elements that management has little control over or that do not reflect the company's sales and production performance. As with any financial metric, it is best to use a combination of profitability metrics to determine the extent of a company's profitability.