A:

Both gross profit and gross margin reflect what a company earns from its sales. Both are determined with information from a company's income statement. Investors seek out these numbers to gauge how well management utilizes company resources to produce income in the company's main business activities.

Gross profit is determined by subtracting cost of goods sold from net sales on the income statement. This metric shows how well a company allocates and uses its resources. Investors can tell a lot from changes in this number from year to year in the same business. A growing gross profit, for example, illustrates better use of resources, more sales or lower production costs. Investors also typically compare gross profit numbers from one business to those of a competing business.

Derived from the gross profit number, gross margin is a percentage metric illustrating efficiency in a company's production. Gross margin is determined by dividing gross profit by revenues. For example, if the net sales of ABC & Co. are $4 million and cost of goods sold is $2.5 million, the gross profit is $1.5 million. Divide that by $4 million to reveal a gross margin of 37.5%. This is a healthy profit margin for any business.

When evaluating profit metrics like gross profit and gross margin, investors should look for trends within industries and sectors of the market to determine if a particular company is doing better, worse or about the same as its competitors. Also, investors should remember that profit margins for certain industries vary from averages within other industries.

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