Gross Profit Margin
Gross profit margin (gross margin) is the ratio of gross profit (gross sales less cost of sales) to sales revenue. It is the percentage by which gross profits exceed production costs. Gross margins reveal how much a company earns taking into consideration the costs that it incurs for producing its products or services. Gross margin is a good indication of how profitable a company is at the most fundamental level, how efficiently a company uses its resources, materials, and labour. It is usually expressed as a percentage, and indicates the profitability of a business before overhead costs; it is a measure of how well a company controls its costs.
Gross margin measures a company's manufacturing and distribution efficiency during the production process. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations, the better the company is thought to control costs. Investors use the gross profit margin to compare companies in the same industry and also in different industries to determine what are the most profitable. A company that boasts a higher gross margin than its competitors and industry is more efficient.
Gross margin is calculated as gross profit divided by total sales (revenue).
Gross profit margin = Gross profit / Revenue
Both variables are shown on the income statement or statement of comprehensive income.
Exact Formula in the ReadyRatios Analytic Software
Gross margin = F2[GrossProfit]/ F2[Revenue]
F2 – Statement of comprehensive income (IFRS).