Gross Profit vs Net Profit: Which Should Investors Focus On

Gross profit vs net profit both appear on the Income Statement of an organization. Gross Profit is defined as the sales figure less cost of manufacture.

The Net Profit figure appears when all costs, which include operating costs, interest, depreciation, and taxes, have been deducted from the total sales. Net Profit is a measure of the profitability while gross profit is an indicator of efficiency.

Introduction

Here comes your annual results analysis for FY25 from Maruti Suzuki. Revenues have increased by 7.5% year on year. Profit after tax has increased by just 5.6%. This difference raises a question – where has the rest of the money gone?

To find out the answer to this question, you need to know what is measured by gross profit and what is measured by net profit.

In this article, we will explain these two terms with the help of formulas, a real Indian business example, and a clear approach to which of these numbers to choose while evaluating a stock. You should start with the income statement first.

What is Gross Profit?

This profit figure reflects the revenue that remains once the cost of production of the item or delivery of the service is paid. It excludes salary payments to management, rent, marketing costs, interest charges, or taxes.

Formula:

Gross Profit = Revenue - Cost of Goods Sold (COGS)

What COGS includes:

• Raw materials and components

• Direct manufacturing labour

• Factory overheads directly tied to production

• Freight and packaging for finished goods

What COGS does NOT include:

• Administrative salaries

• Marketing and advertising costs

• Loan interest payments

• Income tax

Gross Profit Margin Formula:

Gross Profit Margin = (Gross Profit / Revenue) x 100

A firm that is making Rs 100 crores in sales and has COGS worth Rs 60 crores will have gross profit of Rs 40 crores and a gross profit margin of 40%. It will tell us about the efficiency of the production of goods by the company.

What is Net Profit?

Net profit is the part of earnings that remains after accounting for all expenses incurred by the business, including the cost of production, employee wages, rent, interest, depreciation on assets, and income taxes.

Net profit is also called: PAT (Profit After Tax), Net Income, Bottomline, Earnings

Formula:

Net Profit = Gross Profit - Operating Expenses - Depreciation - Interest - Tax

Net Profit Margin Formula:

Net Profit Margin = (Net Profit / Revenue) x 100

Real data: Maruti Suzuki India reported net profit of Rs 13,995 crore for FY2024-25 on net sales of Rs 1,45,115 crore, A net profit margin of approximately 9.6% (Source: Maruti Suzuki BSE filing, April 2025 

Net profit is the number that flows through to shareholders. It determines earnings per share (EPS), dividend capacity, and ultimately drives stock valuation.

What Sits Between Gross Profit and Net Profit?

Most people just beginning in accounting notice a high gross profit number and a small net profit number and question what occurred. The explanation is that there is something called the expense waterfall, which systematically reduces the gross profit to the net profit.

Source: SEBI-prescribed P&L reporting format for NSE/BSE listed companies. Last updated: June 2026.

The higher the difference between gross profit and net profit, the greater is the expenditure of the business firm on overheads, interest cost, and taxes. An example can be taken of manufacturing firms that have high costs of raw materials, royalties paid, labour costs, and capital expenditures in depreciation after gross profit in the income statement.

Gross Profit vs Net Profit - Key Differences at a Glance

Source: SEBI-prescribed income statement reporting format for listed companies on NSE and BSE. Last updated: June 2026.

Both figures appear in every quarterly and annual result filed by NSE and BSE-listed companies. For a deeper reading of how these flow through financial statements, refer to income statement analysis.

Real Indian Example - Maruti Suzuki FY25

A good illustration of this concept would be Maruti Suzuki India Limited (NSE: MARUTI), whose gross and net profit margins tell two different stories, particularly due to the nature of its manufacturing business.

Source: Maruti Suzuki India BSE filing and company results, April 2025.

Even as revenue grew by 7.5%, the net profit increase was only 5.6%. The operating profit margin declined from 13.2% to 11.7%. Why? Total expenses shot up significantly, which included expenses on raw materials purchase, royalty payment to Suzuki Motor Corporation Japan, and benefit expenses of employees.

Here lies the difference. Gross profit was acceptable. But when the operating expense, depreciation, royalty, and taxes were deducted, the net profit growth was found trailing behind.

The investor lesson: While manufacturing stocks, profitability should not be determined by growth in revenue. A growth of 7.5% in revenue resulting in only 5.6% growth in net income with decreasing margins in operations indicates mounting cost pressures that the company has not addressed.

This pattern is not new to Indian markets. During 2021-22, when global commodity prices spiked after COVID-19 supply disruptions, Indian auto and manufacturing companies reported strong revenue growth driven by volume and price hikes - but net profit margins compressed sharply because steel, aluminium, and semiconductor costs rose faster than selling prices. Stock investors who focused on the top line were unable to detect the shrinking margins until it came into view in their earnings surprises.

Why Gross Margin Benchmarks Differ by Sector

The gross profit margin of 15% is completely different for each industry. Incomparable margins of various companies in different industries is one of the major errors made by novice investors.

Source: Based on publicly disclosed financials of NSE/BSE-listed companies. Indicative sector ranges. Last updated: June 2026.

Gross margins of an IT service company are usually greater than 30 per cent since human capital is the major input in the business and not physical inputs. In the case of auto companies such as Maruti, the primary inputs include costs of steel, aluminium, electronic parts, and royalties.

Practical rule: Always compare a company's gross margin and net margin against its own historical trend and against sector peers listed on NSE or BSE - not against companies in different industries.

Which Should Investors Focus On?

For most investors analysing NSE and BSE listed stocks, net profit is the primary metric. It reflects the actual earnings available to shareholders after every obligation is met.

But gross profit becomes important in three specific situations:

• When net profit is distorted: One-time tax credits or exceptional items can inflate net profit in a single quarter. Gross profit gives a cleaner view of core business performance in such periods.

• When comparing production efficiency: Two companies in the same sector with similar revenue but different gross margins reveal which one has better cost control at the production level.

• When tracking input cost impact: If raw material prices rise, gross profit falls before net profit reacts. Monitoring gross margin gives early warning of margin pressure.

A three-step investor check:

1. Is net profit growing consistently over 4-8 quarters? This is the starting point.

2. If net profit is falling while gross profit is stable - the problem is in overheads, interest, or tax burden, not production.

3. If gross profit itself is falling - this signals pricing pressure or rising input costs. A deeper operational problem that typically takes longer to fix.

For a full stock evaluation approach that incorporates both profit types alongside other financial metrics, refer to how to analyse a stock before investing.

Use Dhanarthi to Track Profit Margins of Any Listed Stock

Use the AI Financial Research Assistant to compare gross profit margin and net profit margin trends for any NSE or BSE listed company across multiple quarters - without manually calculating figures from each filing.

Conclusion

In conclusion, while net profit remains the ultimate bottom-line metric for investors to judge a company's true profitability and shareholder value, gross profit is equally indispensable. Gross profit serves as a crucial health check for operational efficiency, production cost control, and core business strength, especially when net profit is skewed by one-time exceptional items or tax adjustments.

The smartest approach for any investor analysing NSE or BSE-listed stocks is not to choose one over the other, but to evaluate both in tandem against the company's historical trends and industry peers. By doing so, you get a complete, transparent picture of both production-level efficiency and final financial health.

Disclaimer: This article is for educational purposes only. It does not constitute investment advice. Please consult a SEBI-registered financial advisor before making investment decisions.

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