What Is the Gross Profit Margin?

What Is the Gross Profit Margin?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

The Gross Profit Margin is a financial metric used to assess a company’s financial health and business model by revealing the proportion of money left from revenues after accounting for the cost of goods sold (COGS). It serves as the percentage of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the gross profit margin, the more the company retains on each dollar of sales to service its other costs and obligations.

Related Questions

1. How do you calculate gross profit margin?

To calculate gross profit margin, first find the difference between total sales revenue and cost of goods sold, which gives you gross profit. Then divide the gross profit by total sales revenue. Multiply this number by 100 to get your gross profit margin percentage.

2. What does a high gross profit margin indicate?

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A high gross profit margin indicates that a company is effectively managing its cost of goods sold and operation costs. It also shows that the company has a cushion to cover its other costs and obligations.

3. Is Gross Profit Margin the same as markup?

No, gross profit margin isn’t the same as markup. Gross profit margin is a profitability ratio showing what percentage of sales revenue becomes gross profit, while markup is the amount added to cost price to get selling price.

4. How does a company improve gross profit margin?

A company can improve its gross profit margin by increasing prices, reducing cost of goods sold or both. Operational efficiency, cost control, and pricing strategy all play major roles in improving the gross margin.

5. Is Gross Profit Margin the same as Gross Profit?

No, they are different. Gross profit is a company’s total revenue minus the cost of goods sold, whereas the gross profit margin expresses the result as a percentage.