In the field of finance, the term utility is synonymous with profit or benefit in relation to some economic activity. However, there is no single way to understand utility, since there is total, marginal, gross and net utility. And all this must be understood within the framework of utility theory.
The calculation of net income
Economists understand utility as the quality that a product has for a consumer to consider it a desirable good, that is, the ability of a product or service to satisfy a need. On the other hand, the profit margin is understood as the percentage of profit from all the operations of a company. The mathematical formula for profit margin is as follows: profit margin = net profit / net sales. Starting from this formula, it must be indicated that the net profit is equivalent to the final return on the sale of a product. In other words, the net profit is the final profit or profit obtained after accounting for all the business costs.
In general, the data on net income are evaluated periodically (every quarter or every year) and allow us to compare business profitability over time. This implies that the net profit is an indicator of the economic profitability of a company.
The difference between gross profit and net profit
Net profit can be confused with a similar concept, gross profit. Gross profit is understood as the difference between all the income obtained by a company and the costs related to production (gross profit is also called gross margin or gross profit). Instead, net income is total revenue minus all costs (production costs and other costs such as depreciation, bank fees, advertising costs, etc.).
Other indicators of business profitability
Both the net profit and the gross profit are two significant indicators to know the business profitability. However, there are other indicators that are equally relevant.
Profitability is economic performance measured in a monetary amount. However, the concept of profitability is too general and must be specified through more specific concepts, such as operating margin, net return on investment, return on equity, ebitda, return on equity, etc. These are some of the profitability indicators, but we must not forget that there are also productivity indicators or debt indicators.
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