Skip to content

What Is Gross Profit Margin?

what is gross profit margin

Definition of Gross Profit Margin

  • The gross profit margin compares the difference between the revenue and cost of goods sold, against revenue.
  • It is represented in the form of a percentage.
  • It is used to evaluate the company’s financial health.
  • A higher markup price and lower cost of goods sold would increase the gross profit margin.

Want to learn more financial ratios?

Get the eBook explaining some of the most useful ratios for free now.

What is the Formula for Gross Profit Margin?

  • The gross profit margin is calculated by dividing the difference between revenue and cost of goods sold by revenue.

      Gross profit margin =  (Revenue – COGS) / Revenue

Gross Profit Margin in Practice

  • During COVID- 19, the revenue of Smile Juice dropped down to $87,900; however, the cost of goods sold remains the same at $56,000. What is Smile Juice’s gross profit margin?
  • ($87,900 – $ 56,000)/ $87,900 = 36.29%

Learn some of the most useful financial ratios!

Don’t miss this free eBook.