Gross profit margin is a financial metric that helps assess a company's financial health and efficiency by analyzing its ability to generate profit from its sales after accounting for the cost of goods sold (COGS). It is expressed as a percentage.
Here’s how to calculate Gross Profit Margin:
-
Calculate Gross Profit:
- Formula: \[ \text{Gross Profit} = \text{Revenue} - \text{Cost of Goods Sold (COGS)} \]
- Where:
- Revenue is the total income from sales of goods or services.
- COGS includes all direct costs attributable to the production of the goods sold by a company.
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Calculate Gross Profit Margin:
- Formula: \[ \text{Gross Profit Margin} = \left(\frac{\text{Gross Profit}}{\text{Revenue}}\right) \times 100 \]
- This formula gives you the gross profit margin as a percentage.
Example Calculation:
- Revenue: $200,000
- COGS: $120,000
-
Calculate Gross Profit: \[ \text{Gross Profit} = $200,000 - $120,000 = $80,000 \]
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Calculate Gross Profit Margin: \[ \text{Gross Profit Margin} = \left(\frac{$80,000}{$200,000}\right) \times 100 = 40% \]
Interpretation:
A gross profit margin of 40% means that the company retains $0.40 from each dollar of sales after incurring the costs associated with producing its goods. A higher gross profit margin indicates greater efficiency in turning sales into actual profit.
Summary:
- Calculate Gross Profit: \( \text{Revenue} - \text{COGS} \)
- Calculate Gross Profit Margin: \( \frac{\text{Gross Profit}}{\text{Revenue}} \times 100 \)
This metric is valuable for comparing profitability across different companies or industries and for tracking performance over time.