What is Gross Profit?

Gross profit is a measure of profitability that reflects the sales income minus the cost of goods sold (COGS). It is also known as gross margin or gross income.

How do you calculate Gross Profit?

To calculate gross profit, subtract the cost of goods sold (COGS) from the total revenue generated by sales. The resulting figure represents your business’s total profits earned before deducting other operating expenses.

What is Gross Profit Margin?

Gross profit margin is an indicator of financial health that measures how much money remains after COGS are taken into consideration as a percentage of total sales. It is calculated by dividing gross profit by total revenue.

How do you calculate Gross Profit Margin?

To calculate the gross profit margin, divide the gross profit (income minus COGS) by the total revenue generated from sales. The result is expressed as a percentage and represents an indication of financial health relative to your company’s overall costs.

What does a high Gross Profit Margin indicate?

A high gross profit margin indicates that your business can generate more profits with fewer investments in goods or services sold relative to its expenses. This means that your business has a greater capacity for growth and a larger cushion to absorb unexpected costs or losses.

Calculating Gross Profit and Gross Profit Margin

Define Gross Profit and Gross Profit Margin

Gross profit is the total earnings retained after subtracting the cost of goods sold from a company's revenue, presented as a dollar value.

Gross profit margin is the gross profit presented as a percentage of a company's revenue.

Formula for Gross Profit

The formula for gross profit is:

Gross Profit = Revenue - Cost of Goods Sold

Where:

Revenue is equal to net sales, or total sales less returns, discounts, and rebates.

Cost of goods sold is the variable costs associated with each unit of production.

Revenue is income earned by a company prior to any expenses. It is known as the "top line" because it's the top line on an income statement, whereas net profit is referred to as the "bottom line" because it is the bottom line on an income statement.

The cost of goods sold are the costs incurred necessary to fulfill orders and do not include fixed costs, which are costs that will be incurred regardless of whether a unit is produced.

Examples of expenses included in the cost of goods sold are:

Hourly labor

Materials for production

Equipment used in production

Packaging

Sales commissions

Transaction fees

Shipping and fulfillment

Formula for Gross Profit Margin

Gross profit is used to calculate gross profit margin. The gross profit margin formula is:

Gross Profit Margin = Gross Profit / Revenue

Gross profit margin (or just "gross margin" ) is gross profit as a percentage of a company's revenue.

Implications of Gross Profit Margin

Since the cost of producing goods is an inevitable expense, some investors view gross margin as a measure of a company's overall ability to generate profit.

The margin remaining after subtracting the cost of goods sold is used to pay for all other expenses, and if the company is profitable, the money left over is known as "net profit."

How to Calculate Gross Profit and Gross Profit Margin FAQs