Wednesday, July 1, 2009

Gross Profit Margin \ Gross Margin Ratio



Gross profit margin is a term used in finance to determine the financial strength of an industry. Gross profit margin is how much profit a company makes after paying off its Cost of Goods sold and other expenses. It is also called gross margin ratio or net profit margin or net margin.

Basically Gross profit margin measures how much out of every dollar of sales a retail business actually keeps in earnings. The gross profit margin ratio is an indicator of a company’s financial health. More the percentage more is the profit. Gross Margin Ratio tells investors how much gross profit every dollar of revenue a company is earning. This metric helps to compare with their competitors and also to calculate their efficiency.

Examples: The Company buys SKU(item) that sell for $50 each. It costs $10 to buy the SKU and it also pays an additional $5 in selling that. That makes the company's net income $35 per SKU (50 - (10 + 5)) and its revenue $50. The profit margin would be (35 / 50) or 70%.

Gross Profit Margin Formula:

Gross profit margin = Gross profit ÷ Total revenue

Or

Gross Profit Margin = (Revenue – COGS) ÷ Total revenue
Where COGS = Cost Of Goods Sold

To Calculate Gross Profit Percentage

Gross profit percentage = (gross profit / sales revenue) x 100

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