What distinguishes gross margin from net margin?

Gross margin and net margin are important financial metrics that serve different purposes in evaluating a company’s profitability. What sets gross margin apart from net margin is that gross margin is calculated before expenses such as operating expenses, taxes, and interest are deducted. It specifically measures the profitability of a company’s core business activities by focusing solely on sales revenue minus the cost of goods sold (COGS).

In contrast, net margin takes into account all expenses and is calculated by subtracting all operating costs, interest, taxes, and other expenses from total revenue. This means net margin reflects the overall profitability of a company after all expenses have been accounted for. Thus, the distinction lies in the timing of the deductions made from the total revenue, with gross margin providing insight into the efficiency of production and sales, while net margin shows the overall profitability of the business.

Understanding these differences is critical for analyzing a company's financial health and operational efficiency.