Gross Profit Margin


DEFINITION of 'Gross Profit Margin'


Calculated as:

Gross Profit Margin

Where:COGS = Cost of Goods Sold

Also known as "gross margin."


Loading the player...

BREAKING DOWN 'Gross Profit Margin'

The gross margin is not an exact estimate of the company's pricing strategy but it does give a good indication of financial health. Without an adequate gross margin, a company will be unable to pay its operating and other expenses and build for the future. In general, a company's gross profit margin should be stable. It should not fluctuate much from one period to another, unless the industry it is in has been undergoing drastic changes which will affect the costs of goods sold or pricing policies.

For example, suppose that ABC Corp. earned $20 million in revenue from producing widgets and incurred $10 million in COGS-related expense. ABC's gross profit margin would be 50%. This means that for every dollar that ABC earns on widgets, it really has only $0.50 at the end of the day.

This metric can be used to compare a company with its competitors. More efficient companies will usually see higher profit margins.

Things to Remember
  • The results may skew if the company has a very large range of products.
  • This is very useful when comparing against the margins of previous years.
  • A 33% gross margin means products are marked up 50% and so on.

  1. Gross Profit

  2. Revenue

  3. Net Income - NI

  4. Cost Of Goods Sold - COGS

  5. Operating Income

  6. Contribution Margin

Related Articles
  1. Markets

    A Look At Corporate Profit Margins

  2. Investing Basics

    Do Your Investments Have Short-Term Health?

  3. Markets

    Understanding Profit Margin

    Learn a primary method investors use to analyze a company's profitability.
  4. Markets

    Introduction To Fundamental Analysis

  5. Professionals

    4 Must Watch Films and Documentaries for Accountants

  6. Active Trading

    An Introduction To Depreciation

  7. Entrepreneurship

    How Gross Margin Can Make or Break Your Startup

  8. Markets

    Operating Cash Flow: Better Than Net Income?

  9. Investing Basics

    How To Efficiently Read An Annual Report

  10. Investing Basics

    Explaining Financial Statement Analysis

  1. How do I read and analyze an income statement?

  2. What types of financial margins should investors pay the most attention to before ...

    The most widely used financial margins are calculated based on income statements and include metrics such as gross profit ... Read Full Answer >>
  3. What is the difference between gross profit margin and net profit margin?

    Gross profit margin and net profit margin are two separate profitability ratios used to assess a company's financial stability ... Read Full Answer >>
  4. What costs are not counted in gross profit margin?

    There are three progressively more inclusive and accurate measures of a company's profitability: gross profit margin, operating ... Read Full Answer >>
  5. How is gross profit margin used in sales?

    The gross profit margin is a baseline profitability ratio measurement against total sales revenue. The gross profit margin ... Read Full Answer >>
  6. What is the difference between gross profit margin and contribution margin?

    Gross profit margin is an overall measure of the total profit on sales that a company makes after subtracting costs directly ... Read Full Answer >>
  7. What is the difference between gross profit margin and markup?

    The difference between gross profit margin, or simply gross margin, and markup lies in the information each provides. Both ... Read Full Answer >>
  8. What is the difference between gross profit margin and operating profit margin?

    Gross profit margin and operating profit margin are two commonly used measures of profitability. The difference between them ... Read Full Answer >>
  9. What's the difference between profit margin and markup?

    Profit margin and markup are two different accounting terms that are often confused and even used interchangeably. In some ... Read Full Answer >>
  10. Does gross profit account for sales returns?

    Whenever a company has a product returned by a customer and is forced to reimburse the proceeds from the sale, that event ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

  2. Quick Ratio

  3. Black Tuesday

  4. Black Monday

  5. Monetary Policy

  6. Indemnity

Trading Center