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Business Financials – 3 levels of Profit Margins
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Published on Friday, 26 April 2024 17:06
There are three different layers of profit margins discussed in financial reports, and they are all found in the Profit & Loss Statement also called Income Statement. This statement details the sales for a specific period, subtracts the cost of goods sold (if you sell products), giving gross profit, and then deducts all general business expenses (overheads) to reveal the operating profit and, ultimately, deducting or adding company taxes plus irregular transactions such as asset such as asset sales or one-off expenses (eg special economic charge) leaves the net profit.
In essence, these are the three primary levels of profit or profit margins:
- Gross profit (after cost of sales deducted from sales/revenue);
- Operating profit (sometimes given = after expenses deducted) also known as Pretax profit (before tax and other non-regular items); and
- Net profit (Final profit, after tax and other non-regular expenses and income).
Be aware that “profit’, “earnings” and “income” terms are often used interchangeably and refer to the same concept. When discussing margins, it can refer to the actual dollar amount or as a percentage of sales/revenues.
The net profit margin is frequently calculated as a percentage (ratio) to gauge a company's profitability over a historical period and compare it to industry benchmarks.
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