Gross profit margin (calculation)

Gross profit margin is a key financial ratio that measures how efficiently a company produces and sells its products or services. Simply put, it indicates the percentage of revenue remaining after subtracting the costs related directly to the production of goods or services sold (cost of goods sold, or COGS).

To calculate the gross profit margin, use the following straightforward formula:

[

\text{Gross Profit Margin} = \frac{\text{Revenue} - \text{Cost of Goods Sold (COGS)}}{\text{Revenue}} \times 100%

]

Here:

• Revenue refers to total income from sales before deducting expenses
• Cost of Goods Sold (COGS) includes direct expenses like raw materials, manufacturing labor, or direct service-related costs

For example, if a company's revenue is $100,000 and the cost of goods sold totals $60,000, the calculation would be:

[

\frac{$100,000 - $60,000}{$100,000} \times 100% = 40%

]

This means that for every dollar earned, the company keeps $0.40 as gross profit, before accounting for operating costs, taxes, or other expenses. Tracking the gross profit margin regularly helps businesses assess pricing strategies, production effectiveness, and overall financial health.