Understanding Gross and Net in Simple Terms

The words "Gross" and "Net" can mean different things depending on whether we're talking about sales (turnover) or profitability (margin).

1. Gross Margin is what we focus on in our analysis. It shows how much profit we make from selling a product. To calculate this, we use the Net Turnover (sales value after removing tax) and subtract the cost of sales (what it costs to produce or buy the product).
   Formula:
   • Gross Margin = Net Sales Value – Cost of Sales
   • Gross Margin % = (Gross Margin / Net Sales Value) × 100
2. Another way to think about it:
   • Gross Margin and Gross Profit help us understand profitability from just the sales process.
   • However, Net Profit Margin (which accounts for all business expenses) gives a clearer picture of overall profitability and is often of greater interest to analysts and investors.

In short, to calculate Gross Margin, we:

• Start with the total sales amount after tax (Net Sales Value).
• Subtract the cost of producing or buying the product.

This gives a clear picture of the profit made directly from selling a product.