Apa itu gross profit margin

Gross Profit Margin Formula

Here’s the formula –

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Source: Gross Profit Margin (wallstreetmojo.com)

In the gross profit margin formulaProfit Margin can be calculated by dividing the gross profit by revenue. Profit margin formula measures the amount earned (earnings) by the company with respect to each dollar of the sales generated. read more, there are two components.

• The first component is gross profit. To calculate gross profit, we need to start with Gross salesGross Sales, also called Top-Line Sales of a Company, refers to the total sales amount earned over a given period, excluding returns, allowances, rebates, & any other discount. read more. Gross sales are the first item in an income statement. We deduct the sales returns/discounts from gross sales and get net sales. The next item in the income statement is the costs of goods sold. When we deduct the expenses of goods sold from net sales, we get the company’s gross profit for the year.
• The second component of the gross margin ratio is revenues. Here, revenues mean the total sales value of goods sold. When we multiply the sales price for each number of goods sold, we get the total revenue. Since “sales returns” or “sales discounts” cannot be included in the total sales value, we must deduct these items from the total sales value. And by removing these, we get “net sales.” And here, we will consider “net sales” as the second component of the gross margin ratio.

Examples

Honey Chocolate Ltd. has the following information in its income statement: –

• Net Sales – $400,000
• Cost of Goods Sold – $280,000

Find out the year’s gross margin.

First, we need to find out the gross profit of Honey Chocolate Ltd.

Here is the calculation: –

• Gross Profit = (Net Sales – Cost of Goods Sold) = ($400,000 – $280,000) = $120,000.

Using the gross profit margin formula, we get: –

• Gross Margin = Gross Profit / Revenue * 100
• Or, Gross Margin = $120,000 / $400,000 * 100 = 30%.
• From the above calculation for the gross margin, we can say that the gross margin of Honey Chocolate Ltd. is 30% for the year.

To interpret this percentage, we need to look at other similar companies in the same industry.

Gross Margin of Colgate

Let us calculate Colgate’s gross margin. Colgate’s Gross Margin = Gross Profit / Net Sales.

Uses

Profitability is an important factor to consider for investors. Investors look at mainly net profit margin along with gross margin. The gross profit margin calculator is useful to investors because they can easily compare it with other similar companies by calculating the percentage.

Comparing the gross profit percentage of all similar companies in the same industry provides the investors with the knowledge of whether the target company’s gross profit is healthy. The better the gross profit percentageGross profit percentage is used by the management, investors, and financial analysts to know the economic health and profitability of the company after accounting for the cost of sales. Gross profit percentage formula = Gross profit / Total sales * 100% read more, the better the company’s overall health and profitability. However, every investor should look at all the financial ratiosFinancial ratios are indications of a company's financial performance. There are several forms of financial ratios that indicate the company's results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more before concluding.

Gross Profit Margin Calculator

You can use the following calculator: –

Calculate Gross Profit Margin in Excel

Let us now do the same example of a gross margin calculator.

It is very simple. You need to provide the two inputs of gross profit and revenue.

Then, you can easily calculate the gross margin in the template provided.

You can download this template here – Gross Profit Margin Excel Template.

Gross Profit Margin Video

Recommended Articles:

This article is a guide to Gross Profit Margin. Here, we discuss the gross profit margin formula for calculating, examples, uses, and interpretation. Here are the other suggested articles: –

• Calculate Profit PercentageThe profit percentage formula calculates the financial benefits left with the entity after it has paid all the expenses. Profit percentage is of two types - markup expressed as a percentage of cost price or profit margin calculated using the selling price.read more
• Gross Profit FormulaGross profit formula is calculated by subtracting the cost of goods sold from the net sales where Net Sales is calculated by subtracting all the sales returns, discounts and the allowances from the Gross Sales and the Cost Of Goods Sold (COGS) is calculated by subtracting the closing stock from the sum of opening stock and the Purchases Made During the Period.read more
• Gross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more
• Net Profit Margin Calculator

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