Definition

The monetary ratio called gross profit margin can be a way of measuring a business ‘s capacity to make a item or supply an agency. The metric will do so by simply assessing the impact the price of products sold is wearing earnings.

Calculation

Gross Profit Margin = Gross Profits / Revenues

Where:

• Gross Profits = Revenues – Cost of Goods Sold

The gross profit margin is also expressed Concerning a percent as shown below:
Gross Profit Margin (percent ) = (Gross Profits / Revenues) X-100

Explanation

When assessing firms, investors and analysts search for a comparatively high gross profit gross profit. High margins signify that the business could get an asset like the skill to require premium-pricing, a patent, or even a trade secret which permits low manufacturing prices. The above mentioned formula shows the price of goods sold means zero, the gross profit margin approaches 100 percent.

When drawing conclusions concerning the comparative performance of an organization, grade comparisons should be made out of competitions in precisely the exact same industry.

Example

Company A’s balance sheet suggests earnings of 29,611,000 and also a price of revenue (yet another name for cost of goods sold) of 15,693,000. Company A’s gross profit margin could be:

= (($29,611,000 – $15,693,000) / $29,611,000) X100
= ($13,918,000/ $29,611,000) X100, or 47.0percent