How is gross profit margin calculated?

The calculation of gross profit margin is fundamental in financial analysis, as it measures the efficiency of a company in producing its goods compared to its sales revenue. Gross profit margin is computed by dividing gross profit by sales.

Gross profit is derived from revenue after deducting the cost of goods sold (COGS), which represents the direct costs attributable to the production of the goods that a company sells. When gross profit is divided by total sales, the result indicates the percentage of revenue that exceeds the cost of goods sold, highlighting the profitability of core business activities without accounting for other expenses such as operating or administrative expenses.

This margin is crucial for understanding how much profit a company retains from each dollar of sales, providing insight into pricing strategy, production efficiency, and potential for covering operating expenses and generating net income.