Business – 10.4 Finance and accounting strategy – Accounting data and ratios | e-Consult

Rapid sales growth can have mixed effects on profitability ratios:

• Gross profit margin may improve if the increase in sales is achieved without a proportionate rise in the cost of goods sold (COGS). This can occur when the business benefits from economies of scale, bulk purchasing discounts, or more efficient production, reducing the unit cost of goods.
• Net profit margin may deteriorate if the additional sales generate higher operating expenses (e.g., marketing, staffing, distribution) that rise faster than revenue. Start‑up costs associated with expansion, such as new premises or equipment, can also increase depreciation and interest costs, squeezing net profit.

Therefore, while growth can boost gross margins through cost efficiencies, it can simultaneously pressure net margins if overheads and financing costs increase faster than sales.