Gross Profit vs. Net Profit

Gross Profit vs. Net Profit

1. Gross Profit:

   • Definition: Gross profit is the profit a company makes after deducting the cost of goods sold (COGS) from its total revenue. It reflects how efficiently a company is producing and selling its goods.
   • Formula: $$\text{Gross Profit} = \text{Revenue} - \text{Cost of Goods Sold (COGS)}$$
   • Example: If a company has revenue of ₹10,00,000 and the COGS is ₹6,00,000, the gross profit would be ₹4,00,000.
   • Use: Gross profit helps in analyzing a company’s production efficiency and pricing strategy. It doesn’t include operating expenses, taxes, or interest.

2. Net Profit:

   • Definition: Net profit, also known as the bottom line, is the profit left after all expenses, taxes, interest, and other costs have been deducted from total revenue. It shows the actual profitability of the company.
   • Formula: $$\text{Net Profit} = \text{Revenue} - (\text{COGS} + \text{Operating Expenses} + \text{Taxes} + \text{Interest})$$
   • Example: Using the previous example, if the company’s operating expenses are ₹1,00,000, taxes are ₹50,000, and interest is ₹20,000, the net profit would be ₹2,30,000.
   • Use: Net profit is a key indicator of a company’s financial health and sustainability. It is used to assess the overall profitability after considering all financial aspects.

In short, gross profit measures efficiency in producing goods, while net profit measures overall profitability.