Gross Profit Percentage: How To Calculate & What It Can Tell You

The gross profit margin is calculated by taking total revenue minus the COGS and dividing the difference by total revenue. The gross margin result is typically multiplied by 100 to show the figure as a percentage. The COGS is the amount it costs a company to produce the goods or services that it sells. At the very least, a company’s gross profit margin should reach the point where revenues cover production costs.

As mentioned before, a high gross profit margin is a good indicator that your business is in good financial health. This is valuable information about your business that you, your competitors, and investors can use. Since it’s a simple metric, business owners and investors love to use gross profit percentage to compare one company’s profitability against its competitors quickly. As an investor, you’ll need to look at some key financial metrics so you can make well-informed decisions about the companies you add to your portfolio.

Gross Profit vs Gross Profit Margin

The GPP usually varies from industry to industry based on its inherent characteristics. For instance, the GPP for a manufacturing company is typically higher than that of a trading company given their nature of business and as such comparing them on the basis of GPP will be foolhardy. A declining trend in GPP can be a cause of concern if it is due to the weak operating efficiency of the company. Net profit margin gives a more comprehensive picture of a company’s overall profitability as it also includes operating expenses, whereas gross profit margin does not. It is wise to compare the margins of companies within the same industry and over multiple periods to get a sense of any trends.

A negative net profit margin occurs when a company has a loss for the quarter or year. Reasons for losses could be increases in the cost of labor and raw materials, recessionary periods, and the introduction of disruptive technological tools that could affect the company’s bottom line. For example, a company has revenue of $500 million and cost of goods sold of $400 million; therefore, their gross profit is $100 million.

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But it should be used in conjunction with other metricx to draw meaningful insights. Take your learning and productivity to the next level with our Premium Templates. Access and download collection of free Templates to help power your productivity and performance. If you do that, it must be incremental or in line with competitors’ strategies.

• With just variable costs included in the calculation, the contribution margin percentage tends to be a better measure of performance.
• There is one downfall with this strategy as it may backfire if customers become deterred by the higher price tag, in which case, XYZ loses both gross margin and market share.
• Thus, an alternate rendering of the gross margin equation becomes gross profit divided by total revenues.
• A higher ratio is usually preferred, as this would indicate that the company is selling inventory for a higher profit.

Gross profit emphasizes the performance of the product or service a company is selling. This makes net income more inclusive than gross profit and can provide insight into the effectiveness of overall financial management. Net income shows the profit from all aspects of the business operations of the company. On the other hand, net income is useful when determining whether a company makes money when taking into account administrative costs, rent, insurance, and taxes. The purpose of net income and gross profit are entirely different in terms of determining the success of the company. Expenses that factor into the net income are COGS, operating expenses, depreciation and amortization, interest, taxes, and all other expenses.

Examples of Gross Profit Percentage (With Excel Template)

If you have any questions you’d like answered before moving forward, please send us an email or call, and we’ll be happy to spend more time to learn more about you and your business. So, for this example, your Gross Profit dollars are $33,000, and your Gross Profit percentage for the month is 30%. To determine your Gross Profit percentage, start by calculating your Gross Profit DOLLARS earned for a specific time period. For example, let’s say you own a contracting business and last month, you brought in Total Revenue of $110,000. The higher your Gross Profit percentage, the healthier your business and the more profit you’ll take home at the end of the day. The stronger-than-expected turnout for “Barbie” reflected, in part, a campaign by David Zaslav, the chief executive of Warner Bros.

Yet another issue is that the cost of factory overhead is largely fixed within general ranges of production volume. Thus, some changes in the gross margin percentage may be caused by changes in the amount of fixed costs and the number of units produced, rather than any real costing issues that management can fix. The term gross profit margin refers to a financial metric that analysts use to assess a company’s financial health. Gross profit margin is the profit after subtracting the cost of goods sold (COGS). Put simply, a company’s gross profit margin is the money it makes after accounting for the cost of doing business.

How the Gross Profit Percentage Can Be Used

A high gross profit percentage signals a healthy business, but there are a few other important considerations to remember when looking at a company’s gross profit ratio. This metric is calculated by subtracting all COGS, operating expenses, depreciation, and amortization from a company’s total revenue. Like the gross and net profit margins, the operating profit margin is expressed as a percentage by multiplying the result by 100.

However, you’ll need to prepare by gathering the information needed in the gross profit ratio formula. Here are 5 easy steps you can follow so that you can start calculating your gross profit percentage in no time. In simplest terms, the gross profit percentage is a percentage of profit made for every $1 spent to generate or produce goods. The gross profit percentage also measures how efficiently a company can use its cost of production to create and sell products profitably.

How to Find Gross Profit on the Income Statement?

Growth companies might have a higher profit margin than retail companies, but retailers make up for their lower profit margins with higher sales volumes. A 25% net profit margin indicates that for every dollar generated by Apple in sales, the company kept $0.25 as new jersey paycheck calculator profit. A higher profit margin is always desirable since it means the company generates more profits from its sales. Put simply, it’s a useful tool to understand the profitability of individual goods or services, but not of holistic operations.

Now that we understand what gross profit percentage tells us, let’s explore how the gross profit ratio formula works, and what its different variables mean exactly. Let us take the example of another company named BNM Ltd. to illustrate the concept of gross profit percentage. It is a toy manufacturing company and it sold 950,000 units of different types of toys last year at an average selling price per unit of $50. Further, the company accordingly incurred a raw material cost of $15.3 million, the direct labor cost of $10.2 million, and factory overhead of $3.4 million during the year. Calculate the gross profit percentage of BNM Ltd for the year based on the given information. Gross profit margin is a measure of profitability that shows the percentage of revenue that exceeds the cost of goods sold (COGS).

It shows insights into the efficiency of a company in managing its production costs, such as labor and supplies, in order to generate income from the sales of its goods and services. Classifying a company’s gross profit as “good” is entirely contingent on the industry that the company operates within and the related contextual details. But before any comparisons can be made, the gross profit must be standardized by dividing the metric by revenue. Indirect costs such as operating expenses and non-core expenses do not affect gross profit.

• Gross profit also allows you to understand the costs needed to generate revenue.
• Proceeds from the sale of equipment that are no longer used for profit are also considered income.
• Gross profit margin and net profit margin are two separate profitability ratios used to assess a company’s financial stability and overall health.
• The gross profit percentage formula is super simple and easy to calculate if you know what you’re looking for within a company’s financial reports.

An alternative approach is to subtract the gross margin from one to arrive at the COGS margin, i.e. Unlike software and related services — which represent sources of recurring revenue — hardware products are one-time purchases. “Barbie,” a feminist manifesto wrapped in hot pink bubble gum, sold an estimated $155 million in tickets at domestic theaters, according to Comscore, which compiles box office data.

If Company ABC finds a way to manufacture its product at one-fifth of the cost, it will command a higher gross margin because of its reduced costs of goods sold. But in an effort to make up for its loss in gross margin, XYZ counters by doubling its product price, as a method of bolstering revenue. The extra amount the company receives from the customer over what the company paid to the vendor is called the profit. The net income generated by a company is divided by its sales, and the result is called the profit percentage. Gross profit percentage is the percentage of money you’ve made from selling a good or service after you subtract the cost of producing that good or service. Gross Profit is one of the most important measures to determine the profitability and the financial performance of a business.