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Glossary

Gross Profit Margin

Gross profit margin is a financial metric that represents the percentage of revenue retained after deducting the cost of goods sold, demonstrating a company's efficiency in producing goods or delivering services.

What is gross profit margin?

Gross profit margin (gpm) represents a company's retained revenue percentage after deducting the cost of goods sold, measuring its ability to cover operational costs and generate profit. The formula for gpm is:

Gross profit margin = (gross profit / revenue) x 100

A higher gpm reflects greater profitability. The interpretation of gpm considers product types, pricing strategies, and the company's cost structure.

How to calculate gross profit margin

Gross profit margin (gpm) measures a company’s financial performance by dividing the gross profit by net sales. Gross profit is calculated by deducting the cost of goods sold from net sales, gauging the company's efficiency in converting sales to profits.

Who uses gross profit margin?

Gross profit margin is an essential metric for companies to assess revenue-to-profit efficiency, applied by owners, managers, sales teams, and accountants to make informed decisions on pricing, production, taxes, and competitive performance.

Watchouts in gross profit margin calculation

Ensure consistent accounting standards for both revenue and costs while including all expenses associated with generating revenue. Exclude one-time or unusual expenses from the calculation.

Limitations of gross profit margin

Gross profit margin does not consider a company's expenses, changes in sales volume, or differentiate profit sources, making it limited in revealing a company's comprehensive profitability.