What are the three 3 elements of the profitability analysis?

To calculate the key profitability margins and ratios, you'll first need three things from your income statement:

Gross profit: Net sales - cost of goods sold (COGS)

Operating profit: Gross profit - operating ‌expenses.

Net profit: Operating profit + other income - other expenses.

For example we are billing 25$ per hour to Software Developers and we are paying 20$ per hour to him.

Revenue = 25$

Cost = 20$

Gross Profit = 25$ - 20$ = 5$

Company spending operating expenses to Software Developers are Insurance, Office supplies, Training and ect.. costs 2$.

Operating Profit: 5$ - 2$ = 3$

Other income from the Software developer is 1$ and there is no expenses for him.

Net profit: 3$ + 1$ - 0$

Net Profit = 4$

Gross Profit Margin = (Revenue - Cost)/ Revenue *100

Operating Profit Margin= (Operating Income/Revenue) * ×100

Operating Income = Operating profit or operating income takes gross profit and subtracts all overhead, administrative, and other operating expenses. Operating expenses include rent, utilities, payroll, employee benefits, and insurance premiums. Operating profit includes all operating costs except interest on debt and the company's taxes.

Net Profit Margin = (Net Income/Revenue) *100

Net Income = Revenue - Operating expenses - Other expenses - Interest - Taxes

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