Net Profit Margin vs Gross Profit Margin

Net Profit Margin and Gross Profit Margin measure profitability at different stages of the financial process. Gross Profit Margin focuses on production efficiency, calculated by subtracting only the direct costs of goods sold (COGS) from revenue, then dividing by revenue. It shows how efficiently a company produces its products or services. Net Profit Margin is more comprehensive, representing the percentage of revenue that remains as profit after accounting for all expenses, including COGS, operating expenses, taxes, interest, and other costs. It reveals the overall profitability of the entire business operation.

A manufacturing company should examine Gross Profit Margin when evaluating production efficiency, material costs, or pricing strategies, as it isolates production-related factors from broader business concerns. For example, if a manufacturer's Gross Profit Margin is declining while production volume remains stable, this indicates rising material costs or pricing pressure that requires immediate attention. Conversely, Net Profit Margin would be more appropriate when assessing the company's overall financial health, comparing performance against competitors, or presenting to investors, as it provides the complete picture of how efficiently the business converts revenue into actual profit, reflecting the impact of all business decisions, not just production-related ones.