No. of Recommendations: 1
Dear ChainSawAl,

gross income = sales - cost of goods sold

gross margin = gross income / sales

operating income = gross income - operating expenses (e.g. advertising, research and development, selling general and administrative)

operating margin = operating income / sales

net income = operating income - interest - other costs (e.g. currency translation for foreign companies)

net margin = net income / sales

"adjustment" means things like merger costs and intangibles are taken out. The idea is that these are not "main business costs" (e.g. merger costs are non-recurring etc.)

Significance? Just data points. For example, high gross margin ("high" may mean > 50%) means that the company "marks up" costs a lot when it sells its widget. This often indicates it has a monopoly or quasi-monopoly on some widget (e.g. Microsoft, Coca-Cola). On the other hand, low gross margins, in themselves, may not necessarily be bad. Retailers often have low gross margins (low markups) and are successful by high sales. Wal-Mart (gross margins in the 20% range) and warehouse club Costco (gross margins around 10%) are examples of successful low-margin companies.

The Rule Makers use gross margins and net margins as screening criteria, you may wish to check out their discussion.

Insert shameless self-promotion

I just finished writing a trial overlong financial statements FAQ a couple of days ago. You may find it useful to check out.

Best wishes,

Lleweilun Smith
Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.