Gross profit margin, also known as gross margin, is a financial ratio that represents the percentage of revenue that exceeds the cost of goods sold (COGS). It is calculated by dividing gross profit by revenue and multiplying the result by 100. The formula for calculating gross profit margin is as follows:
Gross Profit Margin = (Gross Profit / Revenue) x 100
For example, if a company has a gross profit of $500,000 and revenue of $1,000,000, its gross profit margin would be:
Gross Profit Margin = ($500,000 / $1,000,000) x 100 = 50%
This means that for every dollar of revenue generated by the company, it retains 50 cents after accounting for the cost of goods sold.
Gross profit margin is a key financial metric that is used to assess the profitability of a company's core operations. It is commonly used to compare the performance of companies within the same industry, as well as to track a company's performance over time. A higher gross profit margin indicates that a company is generating more revenue relative to its cost of goods sold and is therefore more profitable.