Profit margins

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Top Contributors Arpan Agrawal Related Articles Net Profit Margin Cost of Goods Sold (COGS) Depreciation & amortization expense Disambiguation Dividend

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There are several types of profit margins:

[edit] Gross Margin

• Gross margin is calculated by subtracting Cost of goods sold (COGS) from Net Sales (yielding Gross Profit), which is then divided by Net Sales . COGS can include direct labor costs, productions, and other per unit (or variable) costs - these are typically costs that can be directly tied to sales generated or split revenue.

Example - Google (GOOG) includes TACs (Traffic Acquisition Costs) in its COGS. These are costs that Google splits with its Adsense Network Partners, which are the third-party websites you see that host Google Ads.

Uses - On its own Gross Margin is not very useful, but it can be used for intra-industry analysis. Going with the example above, one may compare Google's pricing power against that of Yahoo! or Microsoft, but because most competitors have diversified business (i.e. other sources of revenue), the valuation insight provided may be diminished.

[edit] Operating Margin

• Operating margin is given by Operating Profit divided by Net Sales. Operating Profit (Income) is: Gross Profit minus all pre-tax expenses, such as SG&A Expenses, R&D Expense, Depreciation & amortization expense, and sometimes Operating Interest Expense (though usually nominal). See the article for a more detailed explanation of its uses as well as an example.

[edit] Net Profit Margin

• Net profit margin is Net Income divided by Net Sales. Net Income is given by (Operating Income - Interest) * (1 - Tax Rate) + Extra Items. This may seem a bit complicated, but it is the income metric from which Dividends (Preferred and Common Stock) are distributed. It also is a useful tool to measure how tax efficient a company is (as always, when compared to a similar company in the same industry). See the article for a more detailed explanation of its uses as well as an example.