| Definition |
Measures the percentage of revenue remaining after deducting the cost of goods sold (COGS). |
Measures the percentage of revenue remaining after deducting both COGS and operating expenses. |
| Formula |
(Revenue − COGS) / Revenue × 100 |
Operating Income / Revenue × 100 |
| Focus |
Focuses on production efficiency and cost control related to core goods/services. |
Focuses on overall operational efficiency, including administrative and selling expenses. |
| Includes |
Only considers direct costs like raw materials and labor. |
Includes direct costs plus indirect costs like salaries, rent, marketing, and utilities. |
| Excludes |
Operating expenses, interest, and taxes. |
Interest and taxes. |
| Indicates |
How efficiently a company produces goods or services. |
How efficiently a company manages all operating aspects of its business. |
| Usefulness |
Used to assess basic profitability and pricing strategies. |
Used to evaluate business viability and operating performance. |
| Higher Margin Suggests |
Strong cost control and pricing power over COGS. |
Efficient management of overhead and operations. |
| Financial Statements |
Appears in the income statement as part of gross profit calculation. |
Appears in the income statement as operating income or EBIT margin. |
| Industry Relevance |
Important for manufacturing and retail industries. |
Important for all industries, especially service-based businesses. |
| Investor Use |
Used to evaluate a company’s core production profitability. |
Used to analyze a company’s profitability before financing and tax effects. |
| Example |
A company with ₹10 crore in revenue and ₹6 crore in COGS has a 40% gross margin. |
If operating expenses are ₹2 crore, the operating margin is 20%. |
Gross Margin vs Operating Margin