Gross Profit Margin

What Is Gross Profit Margin?

Gross profit margin is a type of profit margin that is utilized to measure a company's profitability relative to revenue and is communicated as a percentage. It is a ratio of gross margin, or gross profit, to revenue, and the measurement is a method for assessing a company's ability to create income from its sales in the wake of deducting production costs.

What Does Gross Profit Margin Indicate to Investors?

Investors utilize gross profit margin to assess how a company's executive management is really and productively generating profit from sales. Generally, the higher the margin, the more profitable the company is. The two primary parts are revenue and the costs associated with the production of goods and services (otherwise called cost of goods sold, or cost of sales). High costs are probably going to cut into profitability, while low costs can assist with helping it. Simultaneously, in the event that costs continue as before starting with one quarter then onto the next, an increase in sales can assist with lifting income, while a reduction in sales could lower it.

Step by step instructions to Calculate Gross Profit Margin

Gross profit is calculated by partitioning gross margin (revenue minus cost of sales) by revenue. Both gross margin and revenue show up at the highest point of a company's income statement. For publicly traded companies, financial statements are recorded quarterly and yearly with the Securities and Exchange Commission.

Step by step instructions to Interpret Gross Profit Margin (Example: Apple)

Below is an illustration of Apple's sales and cost of sales from fiscal years 2017 to 2021. (Note: Apple's fiscal years end close to the furthest limit of September, compared to the January-December period that is common for some companies.) Gross profit margin held consistent from 2017 to 2020 however gotten in 2021 as Apple's net sales rose quicker than its cost of sales. The data recommend that even as sales faltered from 2017 to 2020, executive management held production costs in check, and keeping up with those expenses into 2021 assisted with helping the company's gross profit margin.

What Are the Limitations of Gross Profit Margin?

Gross profit margin measures just the top details and doesn't show exposure to different costs like operating expenses, tax payments, and interest charges. Zeroing in on sales and cost of sales is narrow in scope, however involving it related to other profitability ratios could give a more extensive image of a company's ability to deliver earnings.
The two other profit margins connected with gross profit margin are operating profit margin and net profit margin. Together, these three types of profit margin center around things in the income statement and how sales and associated costs lead to earnings.

Highlights

• Gross profit margin is much of the time displayed as the gross profit as a percentage of net sales.
• The gross profit margin shows the amount of profit made before deducting selling, general, and administrative costs, which is the company's net profit margin.
• Gross profit margin is a scientific measurement communicated as a company's net sales minus the cost of goods sold (COGS).

FAQ

How Does Gross Profit Margin Differ from Gross Margin?

Gross profit margin takes gross margin, which is cost of sales minus revenue, and partitions that by revenue. It communicates gross margin relative to revenue as a ratio.

What Is a Good Profit Margin?

A 2015 report showed that for companies with market capitalization surpassing $1 billion, the median average gross profit margin was 42 percent. Being at or over this average would be viewed as great.