What does gross profit margin indicate?
Historically, we used to calculate only gross profit margin, operating profit margin and net profit margin ratios but with the recent changes, we have EBITDA, then EBIT, and now we have enterprise value, EV, by EDITDA. To make it simpler, I would say there are gross profit margin, operating profit margin and net profit margin, gross profit as we know is the direct cost – sales. So raw material, wages etc gets deducted, you work out your gross profit and that gets divided by sales, so you get your gross profit margin percentage. Higher the profit margin, better is the profitability. Operating profit margin is taken as earnings before interest and taxes, EBIT, which is divided by sales. Last is the net profit margin, which is gross profit margin – taxes. Q: What does it mean if there is a huge difference between the gross profit ratio and the net profit ratio of the company? A: Say my gross profit margin is 50% and my net profit margin is 10%, obviously that 40% has been eaten away by th
