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Ratios Made Simple: A beginner's guide to the key financial ratios by Robert Leach

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4. Margins

4.1: Gross Margin and Net Margin

Definitions:

Gross margin = (gross profit x 100) ÷ sales revenue

Net margin = (net profit x 100) ÷ sales revenue

The profit is multiplied by 100 to convert a decimal into a percentage.

Gross profit is the amount of profit a company has earned before deducting its overheads (or expenses).

Net profit is the amount of profit a company has earned after deducting its overheads. This figure is before any deduction for tax or dividends to ordinary shareholders. It is after payment of dividends to preference shareholders and after any other form of payment for debt equity or borrowing.

A simplified set of company accounts is shown in Table 3.

Table 3 – A simplified set of company accounts ...

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