Gross Profit Margin

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Gross Profit Margin

Gross Profit Margin Ratio =

Gross profit

Sales

INTERPRETATION

The Gross Profit Margin ratio is a simple calculation that reveals the profit percentage in the sale price. The ratio indicates how much revenue is left over after covering the direct cost of doing business (labor, materials, and other direct production costs).

Business owners, managers, and other interested parties use this ratio to gain insights into company pricing, cost structure, and production efficiency.

Note: expanded calculation

Subtract the direct expenses or cost of goods sold (COGS) from net sales (gross revenues minus returns, allowances, and discounts), divide by net sales revenues, and multiply by 100% to express as a percentage.

EXAMPLE

The M&M Company charges $240 for their gadget, which costs them $100 to produce—giving M&M a 58% gross profit margin. In other words, 58% of the $240 customers pay for the gadget is profit for M&M Company.

BENCHMARK: PG, HA, ROT

Generally, the higher ratios are more favorable. Higher ratios mean the company sells its inventory at a higher profit percentage.

A “good” gross profit margin is relative. Some businesses (like retail or food-related companies) may see lower margins because they tend to have higher overhead costs. So a 7% to 10% margin is considered a healthy profit margin for most companies.

If your gross profit percentage is less than 1%, your company is selling its product for less than it costs to produce. And if you don’t address this problem, you won’t generate a profit regardless of how much you sell or how efficient the rest of the business is.

Gross Profit Margin Ratio:

ABBREVIATION KEY:

ROT: Rule of thumb
HA: Historical Average (organization’s historical average)
PG: Peer Group average
EB: Economic Benchmark

DISCLAIMER: The interactive calculators on this site are self-help tools intended to help you visualize and explore your financial information. They are not intended to replace the advice of a qualified professional. Because each business is different, we can not guarantee accuracy.