For a while now I have been thinking about Company profits, and how that is relayed in the media, and in particular on the TV/Radio. When company profits are announced it is always the gross amount.
Why it that? And can we do any thing with it
What is the Gross Profit? This Wikipedia entry explains it nicely
Gross profit is found by deducting the cost of goods sold:
Gross profit = Net sales – Cost of goods sold
What I find confusing is that when these figures are quoted in the news it tells us nothing about the company. For example if it brought or sold parts of it business, this would not give an accurate view of sales or what its operating costs are? If these are high it could end up making no money. Gross profit tell us nothing at all. In fact I think it is more misleading and used by some companies as a sort voodoo explanation for its accounts.
What I would like to see it Net income used more by media as a more accurate way to gauge a companies performance. What is Net profit?
Net profit or other wise know as net income is:
Net income = Gross profit – Total operating expenses
The amount this calculation show us tell us much more about the company.
For example an internet company may only have Gross profit of 1 million, if it operation expenses are 100,000 than it profit base line is very healthy.
Alternatively Cement Company Y may have a profit of 1,5 million, but it operation expenses and margin is very high. Let say 60 percent. Meaning that it’s net income (profit) is 600,000. This company is then less profitable than the internet company although is has a higher profit.
Net income is what we need to focus on and concerned about. Gross profit it just voodoo business. It enough people support this idea by commenting below than I would like to take it further.
Let me know you thoughts?