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Margin vs Profit

Updated on April 25, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Margin and Profit

The difference between mrgin and profit are many despite both being the ways that help help in evaluating the performance and health of the company wherein in the case of the margin, the performance and health of the company are evaluated in the percentage term, whereas, in the case of the profit, the performance and health of the company are evaluated in dollars.

Margin-vs-Profit Differences

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There are various ways to check the health of an entity’s business operations. One can measure the performance in relative percentage or absolute dollar terms. Both qualify as measures that allow the management to track the operations under check. They tell a story that provides the management with actionable information.

Margin vs. Profit Infographics

Margin-vs-Profit Infographics

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What Is Margin Vs Profit?

The margin is calculated as a percentage term. It has multiple variants: Gross margin, Operating Margin, and Net profit marginNet Profit MarginNet profit margin is the percentage of net income a company derives from its net sales. It indicates the organization's overall profitability after incurring its interest and tax expenses.read more. In contrast, when it comes to absolute dollar terms to measure the profit, we have Gross profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more, Operating profit, and Net profit.

Margin and profit are two tools to look at the financial performance of a business entity but from different perspectives in mind. When looking for trend analysisTrend AnalysisTrend analysis is an analysis of the company's trend by comparing its financial statements to analyze the market trend or analysis of the future based on past performance results, and it is an attempt to make the best decisions based on the results of the analysis done.read more of the performance of a business entity, one should look at the margin variants as they provide the percentage of the total revenue left after deducting different types of costs.

So, to check the effect of inflation on production cost, one can look at the Gross margin, whereas to check the overall operating performance of the business entity, one should look at the operating margin and analyze the overall profitability one should take a look at the trend in Net profit margin.

Similarly, profit help in analyzing business transactionAnalyzing Business TransactionA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements.read more in pure dollar terms. So, using them, one can know about the monetary profitability and the cash cycle, which reflects the liquidity.

Key Differences

The key differences between them are as follows –

#1 – Gross Profit vs. Gross Margin

Gross profit represents the profit in dollar terms after incurring the direct costs associated with producing the goods and services sold by the business entity. Gross profit is calculated as:

Gross profit = Revenue – Cost of Goods Sold

Gross margin represents the percentage of total revenue after incurring the direct costs of producing the good and services soldProducing The Good And Services SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more by the business entity. Gross margin is calculated as:

Gross margin (%) = (Revenue – Cost of Goods Sold) / Revenue

#2 – Operating Profit vs. Operating Margin

Operating profit represents the profit in dollar terms after incurring the direct costsDirect CostsDirect cost refers to the cost of operating core business activity—production costs, raw material cost, and wages paid to factory staff. Such costs can be determined by identifying the expenditure on cost objects.read more associated with producing the goods and services sold by the business entity and all the operating expenses, including the depreciation and amortization incurred during the operating cycle. Operating profit is calculated as:

Operating profit = Gross Profit – Operating Expenses -Depreciation & Amortization

Operating margin represents the percentage of total revenue after incurring the direct costs associated with producing the goods and services sold by the business entity and all the operating expenses, including the depreciation and amortization incurred during the operating cycleOperating CycleThe operating cycle of a company, also known as the cash cycle, is an activity ratio that measures the average time required to convert the company's inventories into cash.read more. Operating margin is calculated as:

Operating margin(%) = (Gross Profit – Operating Expenses -Depreciation & Amortization) / Revenue

#3 – Net Profit vs Net Margin

Net profit represents the profit in dollar terms after incurring the direct costs associated with producing the goods and services sold by the business entity, all the operating expenses, including the depreciation and amortization incurred during the operating cycle, other expenses, interest, and taxes. Net profit is calculated as:

 Net profit = Operating profit – Other Expenses – Interest – Taxes

Net profit margin represents the percentage of total revenue after incurring the direct costs associated with producing the goods and services sold by the business entity, all the operating expenses, including the depreciation and amortization incurred during the operating cycle, and other expensesOther ExpensesOther expenses comprise all the non-operating costs incurred for the supporting business operations. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities.read more, interest, and taxes. Net profit margin is calculated as:

Net profit margin (%) = (Operating profit – Other Expenses – Interest – Taxes) / Revenue

Comparative Table

BasisMarginProfit
DefinitionMargin provides a way to measure the performance of the operations of a business entity in percentage terms.Profit provides a way to measure the performance of the operations of a business entity in dollar terms.
ContextSince it is calculated in percentage terms, it provides information in a relative context.Since it is calculated in dollar terms, it provides information in absolute context.
TypesThe most common types are gross margin, operating margin, and Net profit margin.The most common types are gross profit, operating profit, and net profit.
UsageIt provides a perspective that allows the management to view the business in the light of effectiveness and efficiency.It provides a perspective that allows the management to view the business in the light of sheer monetary terms.

Applications

As seen above, they seem to be closely related but still have different points of view regarding understanding what each margin or profit calculation implies.

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