Gross profit, the accounting term used to represent the profitability of a production process, is one of the three profit metrics that appear as line items on an income statement, which investors use to see how a company is performing. The other two metrics are operating profit and net income. Unlike net income, gross profit does not take into account taxes paid by the company. This is because gross profit highlights a business activity that exists prior to the business paying income taxes.

What Is Gross Profit?

Gross profit is the number left over after a company subtracts the cost of goods sold, or COGS, from its revenues or sales. This statistic is often referred to as "gross margin" in the United States. One of the primary analytical functions of gross profit is to indicate a company's ability to earn enough money above present expenses to fulfill future expenses; in other words, it highlights cash flow. Gross profit figures vary dramatically from industry to industry, so investors often review competitors' gross profit margins to interpret the relative strength of any one firm's gross profit number.

Another use of gross profit is that it represents how efficiently a company uses labor, raw materials and capital equipment. Companies that are more efficient tend to have higher equity and distribute more dividends. There are taxes paid on the purchase of capital equipment and on labor, so in that sense, gross profit does include some taxes. Those taxes, however, do not represent a line item on an income statement and are of no use to investors.

  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 main reasons for why there could be a negative gross profit margin and ...

    Find out how to calculate a company's gross profit margin, why a firm might experience a negative margin and how to interpret ... Read Answer >>
  3. What is the difference between operating income and gross profit?

    Learn more about the difference between operating income and gross profit, two accounting figures that appear on a company's ... Read Answer >>
  4. What is the formula for calculating profit margins?

    Learn about gross, operating and net profit margins, how each is calculated and how they are used by businesses and investors ... Read Answer >>
  5. 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 >>
Related Articles
  1. Investing

    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 ...
  2. Investing

    Interpreting a Strategy Performance Report

    A strategy performance report can provide key metrics to decide if your strategy is a winner.
  3. Small Business

    A Close-Up On Gross Ups

    Learn about this hidden perk and why it's often bad news for investors.
  4. Investing

    Analyzing Operating Margins

    Learn how to analyze operating margins and how to put this aspect of equity analysis to work.
  5. Investing

    Ex-PIMCO Billionaire Bill Gross Slams Donald Trump

    The billionaire former executive at PIMCO criticized the president-elect for his policies on infrastructure, taxes, and more.
  6. Tech

    Central Banks Doubling Down at The Blackjack Table

    In his monthly investment outlook, Bill Gross says central banks are playing the Martingale Theory game and it won't end well.
  7. Investing

    Key Financial Ratios for Retail Companies

    Using the following liquidity, profitability and debt ratios, an investor can gather deeper knowledge of a retail company's short-term and long-term outlook.
  8. Financial Advisor

    Grading Bill Gross at Janus

    Learn about how Bill Gross, once the head of the largest mutual fund in the market, has had poor investment results at his new fund.
  1. Gross Income

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

    1. For individuals, the total income earned in a year, as calculated ...
  3. Profit

    A financial benefit that is realized when the amount of revenue ...
  4. Operating Profit

    Operating profit is the profit earned from a firm's normal core ...
  5. Net Income - NI

    A company's total earnings (or profit). Net income is calculated ...
  6. Gross Yield

    The gross yield is the yield on an investment before the deduction ...
Hot Definitions
  1. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  2. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  5. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  6. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
Trading Center