What is gross profit margin?
Gross profit margin is a profitability ratio that shows how much revenue is left after a company's production costs have been deducted.
This profit margin basically measures how efficiently a company is producing and selling its goods or services. A high gross profit margin means a company is performing well and generating significant return on its goods or services. A low gross profit margin means revenue is almost the same as the cost of goods sold (COGS).
Where have you heard about gross profit margin?
Financial analysts use gross profit margin to compare similar companies or companies against industry benchmarks. It also tells investors whether or not a company can make a good return companies with a higher gross profit margin will typically be worth more.
What you need to know about gross profit margin.
Gross profit margin is calculated by taking the cost of goods sold (COGS) from the total revenue and dividing that by total revenue.
(Total revenue – COGS)/total revenue
It’s an important factor when reporting on a company’s profitability because it focuses purely on production and selling, without factoring in indirect costs. It’s this bread and butter of business operations that keeps a company healthy.
Gross profit margin can also be calculated using only direct materials. Some argue that this is more accurate as these are the only variables that are directly linked with revenue. This can improve the gross profit margin, as all other costs are filed under administration and operations.
Find out more about gross profit margin.
Learn more about margins and what they mean for investors with our definition.