Margin vs Profit

Difference Between Margin and Profit

Both the margin and profit are the ways which help in evaluating the performance and health of the company wherein case of the margin the performance and health of the company are evaluated in the percentage term, whereas, in case of the profit, the performance and health of the company are evaluated in dollars.

Margin-vs-Profit

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

The margin is calculated as a percentage term. It has multiple variants, namely Gross margin, Operating Margin, and Net profit margin, whereas when it comes to absolute dollar terms to measure the profit, we have Gross profit, Operating profit, and Net profit.

Margin vs. Profit Infographics

Margin-vs-Profit-info

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 associated with producing the good and services sold 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 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 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 cycle. 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, other expenses, interest, and taxes. Net profit margin is calculated as:

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

Comparative Table

Basis Margin Profit
Definition Margin 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.
Context Since 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.
Types The most common types are gross margin, operating margin, and Net profit margin. The most common types are gross profit, operating profit, and net profit.
Usage It 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 put a different point of view when it comes to an understanding, what each margin or profit calculation implies. When management has to check the trend, then margins serve as an invaluable tool, whereas when the sheer monetary effect needs to be viewed, then profit calculation makes more sense.

So, let us say if management wants to see how much of the cost of goods sold is eating up the total revenue from sales then the gross margin can very well serve the purpose. Also, if the management wants to have a look at the overall operations of the business, then the operating margin is the right choice. And if the management wants to analyze the overall health of the business performed during the period, then the net profit margin may prove to be the best key performance indicator.

Similarly, if one wants to analyze where the mark-up over the cost of goods and services sold is high enough to cover the production costs, then Gross profit can present the right information. Whereas to check whether the operations are profitable enough to cover all the direct and indirect costs, then Operating profit does enlighten towards the right direction.

And finally, in order to check the overall profitability for the period of a business entity after incurring all types of costs, including financing costs and taxes, then Net profit is the best alternative out there to be analyzed.

Conclusion

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 analysis 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 in 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 to analyze the overall profitability one should take a look at the trend in Net profit margin.

Similarly, profit help in analyzing business transaction in pure dollar terms. So, using them, one can know about the monetary profitability and the cash cycle, which reflects the liquidity.

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