Calculating Gross Profit Margin Percentage

From The Hoss's Mouth

In today's post, Money Magazine Hoss takes a look at calculating gross profit margin percentage. He will compare the income statements of three companies: General Motors, Amazon and Google. In particular, we will concentrate on the total revenue and gross profit for the years 2006, 2007 and 2008, from which we can calculate the gross profit margin (GPM) for each company for each year.

Why is this number important? Generally speaking, high gross profit margins are considered to be the signs of efficient companies which tend to make decent profits. Investors favor this type of company and are usually willing to pay a higher price per share. This will be clearly demonstrated in our three examples.

Calculating Gross Profit Percentage is not difficult; it is simply Gross Profit divided by Total Revenue.

Let's take a look at the first at the first company Money Magazine Hoss has illustrated for you, Amazon:



Amazon 2006 GPM = 245,600/10,711,000 * 100 = 22.9%
Amazon 2007 GPM = 3,353,000/14,835,000 * 100 = 22.6%
Amazon 2008 GPM = 4,270,000/19,166,000 * 100 = 22.3%

Amazon's GPM has remained constant for the three year period at about 22.5%. A good figure.

Next, Money Magazine Hoss has prepared the GPM for General Motors for the same time frame:



General Motors 2006 GPM = 4,267,000/207,349,000 * 100 = 20%
General Motors 2007 GPM = 12,121,000/181,122,000 * 100 = 6.7%
General Motors 2008 GPM = -1,624,000/148,979,000 * 100 = -11%%

General Motors GPM has been a disaster. Over a three year period it has declined from 20% to a negative figure. Not a company Money Magazine Hoss would invest in.

The third and final company that Money Magazine Hoss selected for the sample three-year period is Google. Take a look:




Google 2006 GPM = 6,379,890/10,604,917 * 100 = 60%
Google 2007 GPM = 9,944,901/16,593,986 * 100 = 60%
Google 2008 GPM = 13,174,044/21,795,550 * 100 = 60%

Google's GPM has remained constant at a very high 60%, which is an excellent Gross Profit Margin.

It is obvious to all that if Gross Profit Margin Percentage was the only criteria an investor was to use in selecting a company to invest in, Google would be the choice. However, as mentioned in Money Magazine Hoss's previous post The Income Statement there are several other criteria which must be taken into consideration. We will be reviewing several of these in future postings.

The June 24, 2009 closing stock prices of Google $409.29, Amazon $79.27 and General Motors $1.11 should not come as any surprise based on their respective Gross Profit Margins. These closing stock prices confirm our statement above: that investors pay higher prices for companies with high Gross Profit Margins.

Stay on track,

The Hoss

Next Hoss Cents Free Financial Money Magazine Post: Operating Margin
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The Income Statement

From the Hoss's mouth

The Income Statement was formally known as the Profit and Loss Statement. Why? Because it shows all of a company's revenues and expenses for a certain period of time, and details any profit or loss.

The prudent investor will review this document in combination with the company's Balance Sheet and Cash Flow Statement when making a decision whether or not to invest in a company.

The following income statement is from Amazon and shows the years 2006, 2007 and 2008.

There are many formulas, ratios and calculations a prudent investor can apply from the information contained in a company's Income Statement. These formulas help the investor determine if a company would be a good investment.

Gross Margin, Net Profit Margin and Return on Equity are just a few. But before explaining these calculations (which The Hoss will do in a later post) one must first understand the details of the Income Statement itself.

The first line of any Income Statement shows the Total Revenue from all sales for the reporting period. (aka the Top Line).

Next we have the Cost of Revenue, which shows the total the company paid to obtain or manufacture the products it sold (aka Cost of Goods Sold or COGS).

The Gross Profit (income) follows and is calculated by subtracting the COGS from the Total Revenue. The greater the Gross Profit, the more likely a company is to have a positive bottom line. This is very clear in our Amazon example, as each year shows a significant increase in the Gross Profit and the Net Income.

Operating Expense is next and it shows...yes, you guessed it, the company's operating expenses. Investors calculate the percentage of expenses to sales to evaluate management efficiency in controlling expenses.

Now we have the Operating Income, which is a measurement of a company's earnings from its own operations. It does not include income from non-operating sources such as interest income.

Gross Profit minus Operating Expenses= Operating Income

The next line on the Income Statement is Income from Continuing Operations. This details the income (if any) that a company generates from non-operating sources such as interest from bank deposits. It is often expressed as a net (income-expenses) as is done in our Amazon example.

Now we find the line Earnings Before Income and Tax (EBIT), which simply is the total of Operating Income plus income from other sources. From this we deduct the next line entry which is Interest Expense (interest payments paid on company debt).

This gives us the next entry, which is Income Before Tax. In our Amazon Income Statement example the figure is $901,000,000. This is the profit Amazon made before paying any taxes.

Income Tax Expense is the line entry that shows the total income taxes the company paid to all government agencies. The income tax expense figure is deducted from the line income before tax to give the company's Net Income from Continuous Operations. Please Note: this is Net Income not Net Profit.

The Net Profit is the money left after any Specialty Items or Extraordinary Expenses are deducted from Net Income from Continuous Operations. What are specialty items or extraordinary expenses? They are called write offs and are supposed to be on- time occasions. Our Amazon example Income Statement provides lines for these expenses, but no actual charges were made in the three years reported.

The Net Income is (aka net profit or net earnings or bottom line) is the total funds available to preferred and/or common stock shareholders.

That pretty much sums up the information in the Income Statement.

The Hoss hopes you have found this explanation of a company's Income Statement beneficial for your investment activities.

In his next post, the Host will give a quick Income Statement summary and will provide information regarding formulas, calculations and ratios investors use for Income Statement analysis.


Stay on track,

The Hoss

Next Hoss Cents Free Financial Money Magazine Post: Gross Profit Margin
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The Balance Sheet

From The Hoss's Mouth

A company's balance sheet is a document which contains valuable information for any potential investor. It provides a financial snapshot of what a company owns (assets) and what it owes (liabilities) on a given date. Each and every transaction has an equal debit and credit entry, therefore the total value of the assets always equals the total value of the liabilities, hence the name "Balance Sheet".

This financial document is divided into two sections: one contains the assets, the other the liabilities.


The Asset side of the balance sheet shows the fixed and current assets. Fixed assets are both tangible and intangible.

Fixed Tangible Assets: include physical property, such as buildings, land, trucks, equipment, and computers, inventory, etc.

Fixed Intangible Assets: things that you can't touch but do have value such as goodwill, trademarks, patents, and long term investments

Current Assets are short term assets which can fluctuate in value very frequently, often every day. They include but are not limited to cash, short-term investments, stock, and consumer debt.

The Liabilities side of the balance sheet contains a company's current and long-term liabilities.
Current Liabilities are a company's short-term obligations such as current year's taxes, short term loans, money owed to suppliers, rent, payroll and bank overdrafts (if any).

Long-Term Liabilities are liabilities that are generally due after one year, such as long-term loans of financing.

The Hoss reminds you that the examples above do not include all the assets and liabilities a company may or may not have.

The balance sheet shows the potential investor how a company is financed, how much capital it is using, the company's liquidity and how solvent it is. The investor can compare several balance sheets to determine the company's ongoing performance.

The next addition of Hoss Cents Free Financial Money Magazine will provide information on the second financial document we are going to look at, The Income Statement.

Stay on track,

The Hoss

Next Hoss Cents Free Financial Money Magazine Post: The Income Statement
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Financial Statements Explained

From The Hoss's Mouth

The technical definition of a financial statement goes something like this, depending on which dictionary you use: a written report that quantitatively summarizes the financial status of an individual or organization for a stated period of time.

Why is a financial statement important to the potential investor? It shows you where a company's money came from, where it went, where it is likely to go, and where it is now.

These are statistics any wise investor must know and understand before purchasing stock in a company or even buying a company outright. It is similar to a racing form, which gives the handicapper important information on all horses running in a race and enables him/her to make a selection based on the criteria s/he deems important.

In short, a financial statement enables you to analyze the financial health of any company you are considering for investment purposes and consists of four main parts.

1. Balance Sheet: Shows at a fixed point in time what a company owns and what a company owes.
2. Income Statements: These show how much money a company made and how much it spent over a certain period of time.
3. Cash flow Statement: A summary of cash inflows and cash outflows during an accounting period.
4. Statement of Shareholders' Equity: Shows what money would be left for the shareholders if a company sold off all its assets and paid off all its liabilities.

The Hoss, in the next several postings, will review in detail each of the main parts of a financial statement. He hopes that once you have read all the information you will have a good understanding of the components of a financial statement and be in a position to make wise investment choices.

Stay on track,

The Hoss

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