Gross margin vs net margin: formulas and worked example
Calculate gross margin and net margin with a complete revenue-to-profit example. Understand the difference from markup, cashflow and operating profit.
Gross margin measures the share of revenue left after cost of sales. Net margin measures the share left after all expenses included in net income, including interest and income taxes. Both percentages use revenue from the same period as their denominator.
Gross and net margin formulas
- Gross profit = net revenue − cost of sales.
- Gross margin (%) = gross profit / net revenue × 100.
- Net margin (%) = net income / net revenue × 100.
Use revenue after discounts and returns. The example below excludes taxes collected on behalf of third parties. Keep your accounting policy and scope consistent across comparisons.
A complete worked example
These illustrative figures do not represent customer results.
| Period total | Amount |
|---|---|
| Net revenue | €100,000 |
| Cost of sales | −€60,000 |
| Gross profit | €40,000 |
| Operating expenses | −€25,000 |
| Operating profit | €15,000 |
| Interest | −€2,000 |
| Income taxes | −€3,000 |
| Net income | €10,000 |
Gross margin is 40% and net margin is 10%. The 30 percentage-point gap is explained by operating expenses, interest and taxes in this simplified example.
Margin versus markup
A product that costs €60 and sells for €100 produces €40 of gross profit. Its margin is 40/100 = 40%. Its markup on cost is 40/60 = 66.67%. Reporting markup as margin materially overstates the share of revenue retained.
What a changing margin can tell you
A lower gross margin invites questions about discounts, returns, product mix, supplier prices and direct delivery costs. When gross margin holds steady but net margin falls, inspect the rest of the income statement. Classification differences can also explain apparent differences between companies.
A profitable company can still run short of cash if customers pay late. Use cashflow and treasury reporting alongside profitability; neither percentage tells you the cash available in the bank.
Make the calculation repeatable
Record the source, reporting currency, period and cost-allocation policy. Calculate aggregate margin from total profit divided by total revenue, rather than averaging product percentages without weighting them. When revenue is zero, the margin percentage is undefined.
The SEC guide to financial statements provides background on income statements. A shared financial reporting workflow helps your team review the same definitions each period.
Margin calculator
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