Gross, EBIT, net — and where a change came from

◈ 8 cards

Compute gross, EBIT and net margins and EBITDA, and read the three margins together to locate the origin of a change in profitability.

Three margins, one stack

A margin is a profit line divided by revenue. Three of them, read top to bottom, tell you where in the income statement a change happened:

$Gross margin = \frac{Gross profit}{Revenue} EBIT margin = \frac{EBIT}{Revenue} Net margin = \frac{Net income}{Revenue}$

For Tamarack (CAD thousands):

                     2025              2024
Gross margin    1,920 / 4,800 = 40.00 %   1,520 / 4,000 = 38.00 %
EBIT margin       720 / 4,800 = 15.00 %     500 / 4,000 = 12.50 %
Net margin        480 / 4,800 = 10.00 %     330 / 4,000 =  8.25 %

Gross margin isolates the product economics: what is left after the cost of the goods themselves. It answers to buying and pricing. EBIT margin (operating margin) subtracts the cost of running the business — stores, staff, depreciation — but stops before interest and tax, so it can be compared across companies with different debt levels and tax positions. Net margin is what the shareholders keep.

Reading the stack

Tamarack’s net margin rose 1.75 points, from 8.25 % to 10.00 %. The stack says where it came from:

Gross margin rose 2.00 points (38 → 40). COGS fell from 62 % of revenue to 60 % — better buying, less discounting, or a richer mix. This is the largest single source.
EBIT margin rose 2.50 points (12.50 → 15.00). That is the 2.00 from gross margin plus a further 0.50 from below it: operating expenses and depreciation together fell from 25.50 % of revenue to 25.00 %. Fixed costs did not grow with revenue — operating leverage.
Net margin rose 1.75 points, less than EBIT margin’s 2.50. Interest ticked up (1.50 → 1.67 %) and tax, at a steady 25 % rate, took its quarter of the larger pre-tax profit. Financing and tax held roughly steady; they diluted the operating gain rather than adding to it.

Diagnosis in one sentence: the improvement is operational — mostly product margin, partly leverage on fixed costs — and not a financing or tax effect. That sentence is what earns the marks; the arithmetic just supports it.

EBITDA

EBITDA adds depreciation (and amortisation) back to EBIT: $720 + 180 = 900$ in 2025, $500 + 160 = 660$ in 2024. It strips out the one large operating cost that involves no cash this year and depends on past capital-spending decisions, which makes it useful for comparing companies with different asset ages or lease structures. It is not a cash-flow measure — it ignores working capital, capital spending, interest and tax — and treating it as “cash profit” is the exam’s standard trap. The cash-flow statement (Module 10) is where cash lives.

Margin is not mark-up

A product bought for $60 and sold for $100 has a gross margin of 40 % (on the selling price) and a mark-up of 66.7 % (on cost). Tamarack’s 40 % gross margin means a 66.7 % mark-up on average. The two describe the same $40; the exam checks which denominator you used.