What Is Gross Profit Margin?
Gross Profit Margin is a measure of a company’s profitability, calculated by subtracting its cost of goods sold (COGS) from its total revenue and dividing the result by total revenue. It is expressed as a percentage and can be used to compare the profitability of different businesses.
Examples of Gross Profit Margin
Let’s look at an example. Suppose a company has total revenue of $100 and its cost of goods sold is $60. That would mean the company’s gross profit margin would be 40%. This means that for every $1 in revenue, the company earned 40 cents in gross profit. In another example, if a company had total revenue of $100 and its cost of goods sold was $80, then its gross profit margin would be 20%. This means that for every $1 in revenue, the company earned 20 cents in gross profit.
Why Is Gross Profit Margin Important?
Gross Profit Margin is an important measure of a company’s profitability because it shows how much of every dollar of revenue is being converted into actual profit. It also serves as an indicator of how well the company is controlling its costs, as a higher gross profit margin means that the company is able to keep its costs of goods sold relatively low. Gross Profit Margin is also a useful metric to compare different companies within the same industry, as it allows investors to quickly assess the relative profitability of each company.
Conclusion
Gross Profit Margin is a key measure of a company’s profitability and can be used to compare different businesses within the same industry. It is important for investors to understand this metric and use it to assess the relative profitability of different companies. Further Reading: