Why is net profit margin always lower than gross profit margin?
Asked 3 years ago
I've come across something interesting after comparing my income statements over the last few months. For some reason, the net profit margin is always lower than the gross profit margin. Am I missing something for not understanding why these profit metrics are related this way? Is this merely a coincidence, or are there specific costs and expenses affecting these figures?
Scottie Gordon
Saturday, October 16, 2021
Yes, the net profit margin is always lower than the gross profit margin. It's because the gross profit margin is equal to the cost of goods sold subtracted from revenue, then divided by revenue. While the net profit margin is determined by subtracting revenue from the cost of goods sold, operating expenses, and other expenses divided by revenue.
To make sure that your calculations are right, make sure that you work out your expenses accurately and that your pricing is correct, as these are common pitfalls when calculating profit margins.
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