Gross Profit

AAA

DEFINITION of 'Gross Profit'

A company's revenue minus its cost of goods sold. Gross profit is a company's residual profit after selling a product or service and deducting the cost associated with its production and sale.

To calculate gross profit: examine the income statement, take the revenue and subtract the cost of goods sold. Also called "gross margin" and "gross income".

INVESTOPEDIA EXPLAINS 'Gross Profit'

When analyzing a company, gross profit is very important because it indicates how efficiently management uses labor and supplies in the production process. More specifically, it can be used to calculate gross profit margin. Keep in mind that gross profit varies significantly from industry to industry. For example, take a look at the following situation to see how gross profit indicates a company's efficiency.

Company A and Company B both have $1 million in sales. Company A's cost of goods sold (COGS) is $900,000 and Company B's COGS is $800,000. Company A's gross profit will be $100,000 and Company B's gross profit will be $200,000. Company B spends less money to make the same amount of sales, and is therefore more efficient.

Learn a little more about gross profit in the article Understanding Profit Metrics: Gross, Operating and Net Profits.

VIDEO

Loading the player...
RELATED TERMS
  1. Income

    Money that an individual or business receives in exchange for ...
  2. Revenue

    The amount of money that a company actually receives during a ...
  3. Net Income - NI

    1. A company's total earnings (or profit). Net income is calculated ...
  4. Operating Income

    The amount of profit realized from a business's operations after ...
  5. Profit Margin

    A ratio of profitability calculated as net income divided by ...
  6. Cost Of Goods Sold - COGS

    The direct costs attributable to the production of the goods ...
RELATED FAQS
  1. How can the first-in, first-out (FIFO) method be used to minimize taxes?

    The first-in, first-out (FIFO) inventory cost method can be used to minimize taxes during periods of rising prices, since ... Read Full Answer >>
  2. How does economic order quantity assist a company with maximizing profits?

    Economic order quantity can assist a company in maximizing profits because it finds the number of units the company should ... Read Full Answer >>
  3. Can you write variable costs off your taxes?

    Variable costs may be deducted from business taxes, depending on the type of variable cost and the nature of the expenditure ... Read Full Answer >>
  4. What are the main differences between single step and multiple step income statements?

    An income statement is a financial summary of a company's financial operations over a set period of time. However, not all ... Read Full Answer >>
  5. What are the differences between gross profit and gross margin?

    Both gross profit and gross margin reflect what a company earns from its sales. Both are determined with information from ... Read Full Answer >>
  6. How are a company's financial statements connected?

    When you do research on different companies by looking at their annual reports, you will typically come across two separate ... Read Full Answer >>
Related Articles
  1. Investing Basics

    12 Things You Need To Know About Financial Statements

    Discover how to keep score of companies to increase your chances of choosing a winner.
  2. Insurance

    Evaluating The Board Of Directors

    Corporate structure can tell you a lot about a company's potential. Learn more here.
  3. Markets

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  4. Fundamental Analysis

    Understanding Profit Metrics: Gross, Operating and Net Profits

    Rather than relying solely on net profit figures to evaluate a company's performance, seasoned investors will often look at gross profit and operating profit as well.
  5. Investing Basics

    Revenue Projections Show Profit Potential

    Examining how a company makes money can offer clues about its earnings potential.
  6. Fundamental Analysis

    Analyzing Operating Margins

    Find out how to put this important component of equity analysis to work for you.
  7. Options & Futures

    Find Investment Quality In The Income Statement

    Use these key attributes to uncover top-level investments.
  8. Forex Education

    Understanding The Income Statement

    Learn how to use revenue and expenses, among other factors, to break down and analyze a company.
  9. Forex Education

    Valuing A Company Using The Residual Income Method

    Learn the underlying basics behind the residual income model and how it can be used to place an absolute value on a firm.
  10. Fundamental Analysis

    Understanding Consolidated Financial Statements

    Consolidated financial statements are the combined financial statements of a parent company and its subsidiaries.

You May Also Like

Hot Definitions
  1. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  2. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  3. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  4. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  5. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  6. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!