Sales rose by THB 25 million this year, gross profit by THB 8 million, and net profit by THB 2 million. Every line sounds stronger. But if you are approving the next set of jobs, the question is: “Do the new jobs leave the same profit per baht of sales?”
The series' hypothetical company has THB 100 million of revenue in year 1 (Y1) and THB 125 million in year 2 (Y2). Gross profit rises from THB 40 million to THB 48 million. Dividing by each year's sales, however, gross margin falls from 40% to 38.40%. Profit increases in baht, but less gross profit remains from each THB 100 sold.
Read both the money amount and the margin, then trace the selling price, costs, and work behind the added sales. All the examples below use a hypothetical equipment seller, systems integrator, and support provider, with 12-month annual statements in THB millions. They are not target margins for SI businesses.
Each profit level deducts different costs
Gross profit is revenue less cost of sales: what remains after the costs of goods or services delivered. In this example, earnings before interest and tax (EBIT) deducts operating expenses as another layer, including office, selling, and other expenses classified there.
Net profit follows interest and tax, so it also reflects financing choices. Businesses that sell and deliver identical work can have different net profits if their interest burdens differ. Do not say “margin” without naming the profit level. Each level leads to a different question.
| Item | Year 1 | Year 2 |
|---|---|---|
| Revenue | 100.00 | 125.00 |
| Cost of sales | 60.00 | 77.00 |
| Gross profit | 40.00 | 48.00 |
| Operating expenses, including depreciation | 25.00 | 30.00 |
| EBIT | 15.00 | 18.00 |
| Interest | 2.00 | 2.50 |
| Profit before tax | 13.00 | 15.50 |
| Tax under the example's assumptions | 2.60 | 3.10 |
| Net profit | 10.40 | 12.40 |
The hypothetical 20% tax rate makes the calculation easy to follow. It does not reflect any business's tax incentives or conditions. Depreciation of THB 5 million in year 1 and THB 6 million in year 2 is already in operating expenses; do not deduct it again when moving from EBIT to net profit.
Reset sales to a THB 100 base
Gross margin equals gross profit divided by revenue, multiplied by 100. In year 2, that is 48 ÷ 125 × 100 = 38.40%. EBIT margin is 18 ÷ 125 × 100 = 14.40%, and net margin is 12.4 ÷ 125 × 100 = 9.92%.
Gross margin
48 ÷ 125 × 10038.40%
On a common-size basis, cost of sales rises from 60% to 61.60% of revenue, while operating expenses fall from 25% to 24%. The lower share of operating expenses cushions performance somewhat but does not fully offset the thinner gross margin. EBIT margin falls from 15% to 14.40%.
Profit in baht and profit margin can move in different directions. A lower-margin job may still make sense if it uses spare delivery capacity and adds enough profit. But check new costs, working capital, and risks before approving it on sales growth alone.| Margin | Year 1 | Year 2 | What to examine next |
|---|---|---|---|
| Gross profit / revenue | 40.00% | 38.40% | Price, direct costs, and revenue mix |
| EBIT / revenue | 15.00% | 14.40% | Operating expenses supporting sales |
| Net profit / revenue | 10.40% | 9.92% | Interest, tax, and items included in net profit |
Where does each THB 100 of revenue go?
Percent of revenue, or baht per THB 100 of revenue
Chart scale: 0 to 100%
Cost of sales
Operating expenses, including depreciation
Interest
Assumed tax
Net profit remaining
Separate revenue streams before explaining the overall margin
This company sells more than one thing. Equipment has purchase costs; systems integration uses a delivery team and subcontractors; support has revenue and costs under its service agreements. Dividing total gross profit by total revenue is valid. To solve a problem, though, separate the changes in each stream.
| Revenue stream | Y1 revenue | Y1 costs | Y1 margin | Y2 revenue | Y2 costs | Y2 margin |
|---|---|---|---|---|---|---|
| Equipment | 60.00 | 40.00 | 33.33% | 75.00 | 48.00 | 36.00% |
| Systems integration | 30.00 | 16.00 | 46.67% | 40.00 | 24.00 | 40.00% |
| Support services | 10.00 | 4.00 | 60.00% | 10.00 | 5.00 | 50.00% |
| Total | 100.00 | 60.00 | 40.00% | 125.00 | 77.00 | 38.40% |
Equipment margin improves from 33.33% to 36%, but the overall margin falls because systems integration and support margins shrink. Support's share of revenue also falls from 10% to 8%. The equipment line alone cannot explain the company-wide result.
The overall margin is a sales-weighted average, not the sum of line percentages divided by the number of lines. For year 2, take total gross profit of 27 + 16 + 5 = THB 48 million and divide by THB 125 million in revenue, or weight each line's margin by its revenue share. Either route agrees with the consolidated statement.
From a falling margin to cost questions
The numbers show where to investigate, not why the change occurred. A lower systems integration margin might reflect selling discounts, delivery hours beyond estimate, dearer subcontractors, or new work that takes time to learn. Open project budgets against actual costs before choosing an explanation.
Distinguish costs that rise with volume from changes in unit cost, and check for rework, warranty work, or unpaid scope changes. If unit prices are stable but delivery hours per project rise, raising every product price may miss the cause.
In a factory, the same principle applies to product mix, raw-material prices, production yield, and scrap. Overall margin can fall when lower-margin goods form more of sales even if each product's own cost has not worsened. Read the product and production-line detail together.
Two years of hypothetical figures cannot prove that the delivery team slowed down or procurement paid more. The supported conclusion is that systems integration and support margins fell. Explanations need testing against actual documents.
Make cost categories comparable before setting a target
A software seller may have purchased licenses for resale, customer cloud-service costs, implementation labor, and support staff. Businesses can classify these differently according to contracts and accounting policies. Moving costs between cost of sales and operating expenses changes gross margin even if total operating profit does not change.
Before comparing with a prior year or a competitor, ask which delivery costs are included, whether allocation rules match, and where occasional items sit. If adjusting figures for analysis, show both reported and adjusted numbers with the reason. Do not simply remove an unwanted item and call the result “normal profit” without criteria.
For an Odoo Partner, this starts with agreeing on product codes, cost accounts, project analytic entries, and time recording. If hours are recorded only for billable work but rework and waiting time disappear, a cost report can look healthy because data is missing. The design must let the work owner check completeness.
After-tax operating profit answers another question
When measuring returns on operating capital, we encounter NOPAT, or net operating profit after tax. In this simple case it is EBIT × (1 − assumed tax rate). For year 2, 18 × 80% = THB 14.4 million, giving a NOPAT margin of 11.52%.
NOPAT is not THB 12.4 million net profit: under this framework it has not deducted after-tax financing costs. A real business must classify operating items and taxes consistently. The effective tax rate on net profit may not stand in for operating tax directly. We return to this in the RNOA article.
EBIT also is not operating cash received: depreciation and payment timing still matter. In the example, EBIT rises to THB 18 million while CFO falls to THB 11.4 million. A complete profit reading must return to the cash-flow statement.
Review profit, then name the work to check
In a meeting to approve new projects, compare forecast revenue and costs with similar jobs. Show delivery hours, subcontractors, warranty work, and scope-change terms. If the margin is below previous work, say what the business gets in exchange and who bears the risk.
When reviewing actual results, choose the revenue stream with the biggest change and open its cost report alongside unbilled work. After “How much profit is left?” comes “When does it turn into cash?” Next, we trace that cash through receivables, inventory, and payables, taking care not to pair a service balance with goods costs from a different scope.
For more on profit and common-size statements, see CFA Institute, Financial Analysis Techniques The tables and calculations are hypothetical examples created for this series, not industry figures or outputs from an installed Odoo system.
