Gross Profit Margin

AAA

DEFINITION of 'Gross Profit Margin'

A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.

Calculated as:

 

Gross Profit Margin

Where:COGS = Cost of Goods Sold

Also known as "gross margin."

INVESTOPEDIA EXPLAINS 'Gross Profit Margin'

The gross margin is not an exact estimate of the company's pricing strategy but it does give a good indication of financial health. Without an adequate gross margin, a company will be unable to pay its operating and other expenses and build for the future. In general, a company's gross profit margin should be stable. It should not fluctuate much from one period to another, unless the industry it is in has been undergoing drastic changes which will affect the costs of goods sold or pricing policies.

For example, suppose that ABC Corp. earned $20 million in revenue from producing widgets and incurred $10 million in COGS-related expense. ABC's gross profit margin would be 50%. This means that for every dollar that ABC earns on widgets, it really has only $0.50 at the end of the day.

This metric can be used to compare a company with its competitors. More efficient companies will usually see higher profit margins.

Things to Remember
  • The results may skew if the company has a very large range of products.
  • This is very useful when comparing against the margins of previous years.
  • A 33% gross margin means products are marked up 50% and so on.

 

 

VIDEO

Loading the player...
RELATED TERMS
  1. Gross Profit

    A company's revenue minus its cost of goods sold. Gross profit ...
  2. Net Income - NI

    1. A company's total earnings (or profit). Net income is calculated ...
  3. Theory Of The Firm

    A microeconomic concept founded in neoclassical economics that ...
  4. Revenue

    The amount of money that a company actually receives during a ...
  5. Gross Margin

    A company's total sales revenue minus its cost of goods sold, ...
  6. Operating Income

    The amount of profit realized from a business's operations after ...
RELATED FAQS
  1. What is the difference between gross profit margin and net profit margin?

    Gross profit margin and net profit margin are two separate profitability ratios used to assess a company's financial stability ... Read Full Answer >>
  2. What costs are not counted in gross profit margin?

    There are three progressively more inclusive and accurate measures of a company's profitability: gross profit margin, operating ... Read Full Answer >>
  3. How is gross profit margin used in sales?

    The gross profit margin is a baseline profitability ratio measurement against total sales revenue. The gross profit margin ... Read Full Answer >>
  4. What is the difference between gross profit margin and contribution margin?

    Gross profit margin is an overall measure of the total profit on sales that a company makes after subtracting costs directly ... Read Full Answer >>
  5. What is the difference between gross profit margin and markup?

    The difference between gross profit margin, or simply gross margin, and markup lies in the information each provides. Both ... Read Full Answer >>
  6. What is the difference between gross profit margin and operating profit margin?

    Gross profit margin and operating profit margin are two commonly used measures of profitability. The difference between them ... Read Full Answer >>
  7. What's the difference between profit margin and markup?

    Profit margin and markup are two different accounting terms that are often confused and even used interchangeably. In some ... Read Full Answer >>
  8. Does gross profit account for sales returns?

    Whenever a company has a product returned by a customer and is forced to reimburse the proceeds from the sale, that event ... Read Full Answer >>
Related Articles
  1. Markets

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  2. Investing Basics

    Do Your Investments Have Short-Term Health?

    If a company is strong enough to survive tough times, it is more likely to provide long-term value.
  3. Markets

    Introduction To Fundamental Analysis

    Learn this easy-to-understand technique of analyzing a company's financial statements and reports.
  4. Fundamental Analysis

    What is Quantitative Analysis?

    Quantitative analysis refers to the use of mathematical computations to analyze markets and investments.
  5. Economics

    Explaining Residual Value

    Residual value is a measurement of how much a fixed asset is worth at the end of its lease, or at the end of its useful life.
  6. Fundamental Analysis

    Why Last In First Out Is Banned Under IFRS

    We explain why Last-In-First-Out is banned under IFRS
  7. Economics

    Understanding Carrying Value

    Carrying value is the value of an asset as listed on a company’s balance sheet. Carrying value is the same as book value.
  8. Economics

    International Financial Reporting Standards (IFRS)

    International Financial Reporting Standards are accounting rules and guidelines governing the reporting of different types of accounting transactions.
  9. Economics

    Explaining Property, Plant and Equipment

    Property, plant and equipment are company assets that are vital to business operations, but not easily liquidated.
  10. Economics

    How to Calculate Trailing 12 Months Income

    Trailing 12 months refers to the most recently completed one-year period of a company’s financial performance.

You May Also Like

Hot Definitions
  1. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  2. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  3. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
  4. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
  5. Wash Trading

    The process of buying shares of a company through one broker while selling shares through a different broker. Wash trading ...
Trading Center