Profit margin calculator

Working down the income statement

Each margin is a profit line divided by revenue. Gross profit is revenue less cost of goods sold. Take operating expenses off that and you have operating income. Subtract interest for pretax income, apply the tax rate, and what remains is net income. Take a hypothetical company with $1 billion of sales, $600 million of cost of goods and $250 million of operating expenses: the gross margin is 40% and the operating margin 15%. After $20 million of interest and a hypothetical 21% tax rate, net income is $102.7 million, a 10.27% net margin. Spread across 50 million shares, that is $2.054 a share, printed as $2.05. The lesson on the income statement from revenue down to earnings per share reads each line in order.

What each margin tells you

Gross margin is the pricing and production story, the part of each sales dollar that survives the direct cost of making or buying what was sold. Operating margin adds the cost of running the business. One point of operating margin on billion of sales is 0 million of operating income, before interest and tax. It is the line most worth comparing between companies in the same industry, as argued in operating margin is the earnings line worth reading first. Net margin brings in financing and tax, which can differ a great deal between two companies whose operations look identical. What counts as good depends on the industry. What is a good operating margin sets out how to compare one with peers.

Where reported figures differ

Real income statements carry lines the inputs do not: depreciation shown on its own or buried in cost of goods, one-time charges, interest income, gains on investments, the share of profit owed to minority holders. The tax line is the provision the company actually recorded, which rarely equals a statutory rate times pretax income. Reported EPS divides by the weighted average share count for the period, and diluted EPS adds shares from options and convertibles, so a figure built from year-end shares will be off. Adjusted earnings sit a further step away. Operating leverage explains why operating income can swing harder than revenue from one quarter to the next.