Gross Profit vs Net Profit

Gross Profit and Net Profit measure profitability at different stages of a company's financial operations, reflecting distinct aspects of business performance. Gross Profit represents the money remaining after subtracting only the direct costs of producing goods or services (Cost of Goods Sold) from revenue, providing insight into production efficiency and pricing power. Net Profit, often called the "bottom line," shows what remains after deducting all expenses—including COGS, operating expenses, taxes, interest, and non-operating items—from revenue, revealing the true earnings available to owners after all obligations have been met.

A retail company should focus on Gross Profit when evaluating merchandising decisions or pricing strategies, as it isolates the direct relationship between sales price and production costs. For example, if a clothing retailer notices their Gross Profit declining despite stable sales volume, they might need to address rising supplier costs or adjust pricing to maintain margins. Conversely, the same company would emphasize Net Profit when making broader strategic decisions or communicating overall financial health to investors. If the retailer maintains a healthy Gross Profit but shows declining Net Profit, this suggests that operating expenses like rent, marketing, or administrative costs are consuming too much of the margin, requiring operational efficiency improvements rather than changes to product pricing or sourcing. While Gross Profit measures the efficiency of core production activities, Net Profit ultimately determines a company's ability to generate wealth for its shareholders.