Gross Profit Margin Formula, Calculator and Example

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Gross Profit Margin Formula, Calculator and Example

gross profit margin formula

According to CFO Hub, retailers’ average gross profit margin is 24.27%. The latter amounts to 13,541 since other items are not included in variable costs. The latter is not covered by gross income and is not included in the formula. Advertising, rent, and auto insurance, office supplies, and salaries of directly-involved-in-production staff are considered as fixed costs.

We use this value to calculate the basis of production efficiency for a business. But if you’re new to calculating gross profit margin, you may want a baseline for comparison. It’s often helpful to look deeper than just the overall GPM of the company. You can look at the gross margin of specific products to see which ones bring in the most profit. This is useful for choosing where to concentrate your marketing efforts. Gross profit margin is the percentage of revenue that is actual profit before adjusting for operating costs, such as marketing, overhead, and salaries.

Limitations of Gross Profit Margin Percentage

The gross profit margin percentage gives you valuable information about your business. Overall, the GPMP is a good indicator of the company's financial health. Its simplicity makes it an easy metric for comparing your business to your competitors' (assuming their GPMP's are known). If your GPMP is better than your competitors', it confirms that you're operating the business with better than average efficiency. If your GPMP is less than your competitors', it's a warning that your pricing, sales and/or manufacturing adjustments need to be made. The gross profit margin is more useful to investors as a percentage because it allows easy comparison of companies regardless of their sizes and volumes.

gross profit margin formula

The gross profit method is an important concept because it shows management and investors how efficiently the business can produce and sell products. Gross profit margin offers a limited view of whether or not a company, as a whole, is profitable. It doesn’t account for operating expenses, such as payroll, overhead, and marketing spend.

How Do You Calculate Gross Profit in Dollars?

The recent annual report states that the company achieved revenue of $221.57 billion in 2018 vis-à-vis $217.75 billion in 2017. On the other hand, the corresponding cost of sales was $120.34 billion in 2018 vis-à-vis $117.51 billion in 2017. Calculate the gross margin of the company for the year 2017 and 2018. Both the total sales and cost of goods sold can be found on the profit & loss statement. Occasionally, the cost of goods sold can be broken down into smaller categories like raw materials and labor costs. On the income statement, the gross profit line item appears under the cost of goods line, which comes right after revenue (i.e. the “top line”).

gross profit margin formula

Key metrics are often ones where a company’s performance – as indicated by the metric – is substantially different from that of most of its competitors. By considering the above factors along with the profitability margins covered in this article, you’ll be well on your way to performing complete financial analyses. As you can see from the screenshot, if you enter a company’s revenue, cost of goods sold, and other operating expenses you will automatically get margins for Gross Profit, EBITDA, and Net Profit. EBIT is the same thing as Operating Profit; EBITDA is slightly more refined, closer to Net Profit. The ratio indicates the percentage of each dollar of revenue that the company retains as gross profit. Profit margin gauges the degree to which a company or a business activity makes money. Gross profit margin is often shown as the gross profit as a percentage of net sales.


As we’ve already figured out, you need two parameters – variable charges and total earnings. Subtract the smaller value from the larger one to get gross profit. If the larger value in the formula is represented by variable costs, you might as well stop because... In some industries, like clothing for example, profit margins are expected to be near the 40% mark, as the goods need to be bought from suppliers at a certain rate before they are resold. In other industries such as software product development the gross profit margin can be higher than 80% in many cases.

What does the gross profit margin tell us?

The gross profit margin can tell us a lot about a company's health and efficiency. A high margin usually indicates that the company is good at producing and selling its products, while a low margin may suggest that the company is struggling to make a profit. Investors often look at a company's gross profit margin when deciding whether to invest in it.

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