Expert: Dr. Joseph de Beauchamp - 7/31/2005

Question
Hello,
I am a beginning investor. I would like to know the difference between profit margins, gross margins, and operating margins.

For example, when I look up stock info for the company MSFT, i see:

Revenue(ttm): 39.79B
Net Income(ttm): 12.25B
Gross margin(ttm):84.42%
Oper margins(ttm):36.60%

How does the net income and revenue fit into the calculation of those two margins? When i divide net income by revenue i get a profit margin of 31%.

Thanks,
Mark


Answer
Mark,

You appear to be correct. There are a number of ways to hit this percentage. Profit margin should be net income divided by gross revenue. Gross margin should be the revenues divided into net revenues (minus cost of goods). Operating margin should be dividing the revenues into the earnings before taxes and interest (EBIT). If you are getting different numbers, the places you are pulling this might not have the most recent numbers from the 10-q or 10-K.

Dr. Joseph de Beauchamp