Module 2 of 11 14 min
Profit and Margins
Gross profit, net profit, and why margins tell you more than totals.
Course lessons
Step 1
The lesson
"Profit" means different things at different stages. Analysts look at three:
- Gross profit = revenue − cost of goods sold (COGS). How much is left after paying for what was sold.
- Operating income = gross profit − operating expenses. What the core business earns.
- Net profit (net income) = operating income − interest and taxes. The bottom line.
Key term
Margin
A profit number divided by revenue, shown as a percentage. A 10% net margin means the company keeps 10 cents of every dollar of sales.
Margins let you compare businesses of different sizes. They also reveal the type of business: software companies often have very high gross margins because an extra copy costs almost nothing to make, while grocery stores famously run on thin net margins — often just a few percent.
Thin margins aren't bad by themselves, but they leave little room for error. A small rise in costs can erase all the profit.
Step 2
See it
Revenue of $120,000 becomes gross profit of $78,000 (65% margin), operating income of $18,000 (15%), and net profit of $14,000 (11.7%).
- Revenue
- $120,000
- Cost of goods sold
- −$42,000
- Gross profit65% gross margin
- $78,000
- Operating expenses
- −$60,000
- Operating income15% operating margin
- $18,000
- Interest and taxes
- −$4,000
- Net profit11.7% net margin
- $14,000
Step 3
Real-world example
Same profit, very different businesses
Two hypothetical companies each earn $1 million in net profit.
- Company A has $2 million in revenue — a 50% net margin.
- Company B has $50 million in revenue — a 2% net margin.
Now suppose costs rise by 3% of revenue for both. Company A still earns a healthy profit. Company B's $1.5 million cost increase wipes out its entire profit — it now loses $500,000. Same profit on paper; very different fragility.
Step 4
Try it: margin calculator
This is Company B: $50 million in revenue and a 2% net margin. Raise operating expenses by $1,500,000 and watch the profit disappear.
Your numbers
Direct costs of what was sold: ingredients, inventory, materials.
Running the business: wages, rent, marketing, software.
Results
Gross margin
30%
Operating margin
3%
Net margin
2%
$1,000,000 net profit
| Revenue | $50,000,000 |
|---|---|
| − Cost of goods sold | −$35,000,000 |
| Gross profit30% margin | $15,000,000 |
| − Operating expenses | −$13,500,000 |
| Operating income3% margin | $1,500,000 |
| − Interest and taxes | −$500,000 |
| Net profit2% margin | $1,000,000 |
Educational calculator, not financial advice. Results are hypothetical estimates based on the numbers you enter.
Step 5
Knowledge check
Answer each question, then check your answer to see the explanation. Retake it as many times as you like.
Question 1 of 3
Step 6
Summary
Gross profit subtracts the cost of what was sold; operating income subtracts running costs; net profit subtracts interest and taxes. Margins turn each into a percentage of revenue, making companies comparable and revealing how much room they have for mistakes.
Step 7
What you should remember
- Gross → operating → net: three levels of profit.
- Margin = profit ÷ revenue.
- Margins reveal the kind of business and its fragility.
- Thin margins leave little room for rising costs.
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