Gross Profit

Loading the player...

What is 'Gross Profit'

Gross profit is a company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit will appear on a company's income statement or can be calculated with this formula:

Gross profit = revenue - cost of goods sold

Also called "gross margin," "sales profit" and "gross income".

BREAKING DOWN 'Gross Profit'

Gross profit assesses a company's efficiency at using labor and supplies. The metric only considers variable costs, that is, costs that fluctuate with the level of output: materials; direct labor, assuming it is hourly or otherwise dependent on output levels; commissions for sales staff; credit card fees on customer purchases; equipment, perhaps including usage-based depreciation; utilities for the production site; shipping; etc. As generally defined, gross profit does not include fixed costs, or costs that must be paid regardless of the level of output: rent, advertising, insurance, salaries for employees not directly involved in production, and office supplies.

However, it should be noted that a portion of the fixed cost is assigned to each unit of production under absorption costing, which is required for external reporting under GAAP​. For example, if a factory produces 10,000 widgets in a given period, and the company pays $30,000 in rent for the building, a cost of $3 would be attributed to each widget under absorption costing. 

Gross profit shouldn't be confused with operating profit, also known as earnings before interest and tax (EBIT). 

Gross profit can be used to calculate the gross profit margin. Expressed as a percentage, this metric is useful for comparing a company's production efficiency over time. Simply comparing gross profits from year to year or quarter to quarter can be misleading, since gross profits can rise while gross margins fall, a worrying trend that could land a company in hot water. The terminology here can cause some confusion: "gross margin" can be used to mean either gross profit and gross profit margin. Gross profit is expressed as a currency value, gross profit margin as a percentage. The formula for gross profit margin is:

Gross profit margin = gross profit / revenue = ( revenue - cost of goods sold ) / revenue

Gross profit margins vary greatly by industry. Food and beverage stores and construction firms have razor-thin gross profit margins, for example, while the healthcare and banking industries enjoy much larger ones. 

Here is an example of how to calculate gross profit and the gross profit margin, using Ford Motor Co.'s (F) 2014 annual income statement (all numbers in millions of USD):

Revenues  
Automotive 135,782
Financial services 8,295
     Total revenues 144,077
Costs and expenses  
Automotive cost of sales 123,516
Selling, administrative and other expenses 14,117
Financial Services interest expense 2,699
Financial Services provision for credit and insurance loss 305
     Total costs and expenses 140,637

To calculate the gross profit, we first add up the cost of goods sold:

Automotive cost of sales ($123,516 m) + FS interest expenses ($2,699 m) + FS provision for credit and insurance loss ($305 m) = $126,520 m

We do not include "Selling, administrative and other expenses," since these are mostly fixed costs. We then subtract the cost of goods sold ($126,520 m) from total revenues ($144,077 m) to obtain a gross profit of $17,577 m.

To obtain the gross profit margin, we divide the gross profit ($17,577 m) by total revenues ($144,077) for a margin of 12.20%. This compares unfavorably to an automotive industry average of around 20%, suggesting that Ford does not operate as efficiently as its peers.

Standardized income statements prepared by financial data services may give slightly different gross profits. These statements conveniently display gross profits as a separate line item, but they are only available for public companies. Investors reviewing private companies' income should familiarize themselves with the cost and expense items on a non-standardized balance sheet that do and don't factor into gross profit calculations.

For more on gross profit, see Understanding Profit Metrics: Gross, Operating and Net Profits.

RELATED TERMS
  1. Gross Income

    1. An individual's total personal income, before accounting for ...
  2. Gross Profit Margin

    A financial metric used to assess a firm's financial health by ...
  3. Gross Margin

    A company's total sales revenue minus its cost of goods sold, ...
  4. Adjusted Gross Margin

    A calculation used to determine the profitability of a product, ...
  5. Profit Margin

    Profit margin is part of a category of profitability ratios calculated ...
  6. Gross Earnings

    1. For individuals, the total income earned in a year, as calculated ...
Related Articles
  1. Taxes

    What is Gross Income?

    Gross income is an individual’s total income before taxes and other adjustments are considered.
  2. Term

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  3. Entrepreneurship

    How Gross Margin Can Make or Break Your Startup

    Find out how your startup's gross margin can impact your business, including why a mediocre margin may spell disaster for a budding business.
  4. Term

    Gross, Operating and Net Profit Margins

    A company’s income statement includes the company’s gross, operating and net profits.
  5. Markets

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  6. Professionals

    Goals Of Financial Management

    Find out the goals that all businesses have in common.
  7. Investing

    Gross Profit

    Gross Profit is one of several important measurements of a company's profitability.
  8. Markets

    Profitability Indicator Ratios: Profit Margin Analysis

    By Richard Loth (Contact | Biography)In the income statement, there are four levels of profit or profit margins - gross profit, operating profit, pretax profit and net profit. The term "margin" ...
  9. Fundamental Analysis

    The Gross Margin

    A business's "gross margin" is a rough gauge of how profitable its operations are. It measures how much sales revenue the company retains after all of the direct costs associated with making ...
  10. Markets

    Fundamental Analysis: The Income Statement

    By Ben McClureThe income statement is basically the first financial statement you will come across in an annual report or quarterly Securities And Exchange Commission (SEC) filing. It also contains ...
RELATED FAQS
  1. What is the difference between gross margin and gross profit?

    Understand the difference in definitions between gross margin and gross profit, and learn what each represents as a metric ... Read Answer >>
  2. What are the differences between gross profit and gross margin?

    Learn how gross profit and gross margin are calculated and how each is used in fundamental analysis. Generally, these numbers ... Read Answer >>
  3. Does gross profit include tax?

    Find out what gross profits are, how they are calculated, how they are interpreted by investors and whether taxes are taken ... Read Answer >>
  4. What is the difference between revenue and cost in gross margin?

    Discover the differences between revenue and cost in gross margin, along with an explanation of various measures of profitability. Read Answer >>
  5. How is gross profit margin used in sales?

    Learn and understand the meaning and usefulness of the gross profit margin figure for a company in relation to its total ... Read Answer >>
  6. What is the difference between gross profit margin and operating profit margin?

    Understand the difference between gross profit margin and operating profit margin, two measures of corporate profitability ... Read Answer >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center