October 06, 2025
2 mins read
When you’re trying to figure out how profitable a business really is, two terms often come up—gross margin and net margin. These two types of margins sound alike, but they measure very different things. Understanding the difference between gross margin and net margin can help you get a clearer picture of a company’s costs, earnings, and how efficiently it's being run.
Let’s break these terms down in simple language, so even if you’re not a finance expert, you can still read a profit statement and know what it means.
Gross margin, or gross profit margin, shows how much of the total revenue is left after subtracting the direct costs of producing goods or services. In other words, it tells you how efficiently a company turns sales into gross profit.
If a company has a gross margin of 80%, it keeps ₹0.80 as gross profit for every ₹1 it earns in revenue. This number shows how well it’s managing its production-related expenses.
To calculate gross margin, you first need to find gross profit. Most companies list this in their income statements. But you can also work it out manually by subtracting the following direct costs from total revenue:
Raw materials used
Labour charges
Manufacturing costs
Inventory maintenance expenses
These are all considered core operational expenses. That’s why gross margin and net margin differ—gross margin focuses only on production-related costs.
Formula to calculate gross margin:
Gross Margin = (Gross Profit ÷ Total Revenue) × 100
Net margin (also known as net profit margin) measures how much of the total revenue is left after all costs are deducted—including administrative expenses, interest, taxes, and depreciation.
While gross margin only considers the cost of goods sold, net margin goes deeper. That’s why gross margin and net margin can show very different percentages—net margin is usually lower.
It shows the real profitability of the company after every expense is taken into account.
Before you can find net margin, you need to calculate net profit, which is also listed on the income statements. You subtract these from the total revenue:
Cost of revenue
Depreciation
Admin and overhead costs
Loan interest
Taxes
Any other period-specific expenses
You can also find net margin by subtracting all the above from gross profit, instead of starting from total revenue again.
Net Margin formula:
Net Margin = (Net Profit ÷ Total Revenue) × 100
Note: Sometimes income statements refer to total revenue as “net sales.” That’s usually after adjusting for discounts or returns.
Read Also:- Gross Margin vs. Contribution Margin
Here’s an example using sample numbers to show how gross margin and net margin are calculated:
Particulars | Amount |
Total revenue | ₹6,00,000 |
Raw materials | ₹30,000 |
Wages | ₹20,000 |
Salary | ₹90,000 |
Interest | ₹15,000 |
Miscellaneous expenses | ₹12,000 |
Tax | ₹13,000 |
Step 1: Gross Profit
Gross Profit = ₹6,00,000 − (₹30,000 + ₹20,000) = ₹5,50,000
Gross Margin = (₹5,50,000 ÷ ₹6,00,000) × 100 = 91.67%
Step 2: Net Profit
Net Profit = ₹5,50,000 − (₹90,000 + ₹15,000 + ₹12,000 + ₹13,000) = ₹4,20,000
Net Margin = (₹4,20,000 ÷ ₹6,00,000) × 100 = 70%
So, the gross margin and net margin for this example are 91.67% and 70%, showing how additional expenses reduce final profitability.
Understanding the difference between gross margin and net margin helps investors and business owners identify how well a company is handling both direct and indirect costs.
Gross margin looks at production efficiency. It tells you how well the company manages its direct costs like materials and labour.
Net margin shows overall profitability after every cost is counted—office rent, salaries, interest, taxes, and more.
Together, gross margin and net margin help compare companies within the same industry. They also reveal how well a company is handling its entire cost structure—not just its production expenses.
While useful, these metrics aren’t perfect. They have a few limitations you should keep in mind:
Industry differences: Margins vary a lot by sector. A good margin in one industry may be poor in another.
Limited scope: Relying only on gross margin and net margin won’t give you the full picture.
Need for more context: Ratios like operating margin are also important for a complete financial review.
Now that you understand the difference between gross margin vs. net margin, you’ll be better equipped to analyse any business’s profitability. These two types of margins don’t just show how much money is coming in—they reveal how well that money is being used. Whether you’re an investor, business owner, or just curious, keeping an eye on gross margin and net margin can help you make smarter decisions.
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Gross and net margins help you understand how well a business turns revenue earned into profit. While gross margin shows how efficient the production process is, net margin reveals overall profitability after all expenses. Tracking both gives a clearer picture of financial performance and cost control.
What’s considered a good net margin depends on the industry. For many businesses, anything above 10% is healthy. In high-margin industries like software, it could be 20% or more. In low-margin sectors, even 5% may be acceptable. Always compare within the same industry for context.
Yes, a high net profit margin usually means the business is managing its expenses well. It shows the company keeps a good portion of its revenue after paying all costs, which can mean better returns, more room for growth, and strong financial health over time.
A high net margin points to strong cost control and efficient operations. It often means the company is pricing its products well and keeping overheads low. This makes the business more resilient, better positioned for growth, and more attractive to investors or lenders.
Both types of margins are used by investors to judge a company's profit potential. Higher gross and net margins usually mean the business earns more per sale and controls costs well. That leads to better valuations because it shows strong performance and a better ability to grow profits.
Yes. A company can manage production costs well but still have low net profit due to high overheads, interest payments, or taxes. This means the core business is profitable, but too much money is lost in other areas before reaching the final bottom line.
It’s smart to review profit margins at least every quarter. This helps track if costs are rising or if profit levels are dropping. Regular reviews allow businesses to make quick changes, improve efficiency, and keep overall performance on track.
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