Profit Margins: Gross, Operating & Net

Profit margins show how much of each sales dollar a company keeps as profit at different stages of the income statement. As you move down from revenue, more costs are subtracted, so each margin is smaller than the last. The three headline margins are gross, operating, and net.

Read the three margins as a cascade down the income statement:

• Gross margin = (revenue − cost of goods sold) ÷ revenue. It shows raw product profitability before running costs, and high gross margins often point to pricing power.
• Operating margin = operating income ÷ revenue. It adds the cost of running the business (salaries, marketing, R&D) and reflects how efficiently the core operation is managed.
• Net margin = net income ÷ revenue. The bottom-line figure after interest and taxes, showing what finally reaches shareholders.
• Compare within an industry: a 10% net margin is excellent for a grocer and thin for a software firm, so margins only mean something against peers and over time.

On $100M of revenue, a company has $58M gross profit (58% gross margin), $34M operating income (34% operating margin), and $22M net income (22% net margin). The shrinking percentages trace the cost of doing business.