# Gross Profit Margin

## Definition

The financial ratio known as gross profit margin is a measure of a company's ability to profitably make a product or supply a service.  The metric does this by comparing the impact the cost of goods sold has on revenues.

### Calculation

Gross Profit Margin = Gross Profits / Revenues

Where:

• Gross Profits = Revenues - Cost of Goods Sold

The gross profit margin can also be expressed in terms of a percentage as shown below:

Gross Profit Margin (%) = (Gross Profits / Revenues) x 100

### Explanation

When evaluating companies, analysts and investors look for a relatively high gross profit margin.  High margins indicate the company may have an advantage such as the ability to demand premium pricing, a patent, or a trade secret that allows for low manufacturing costs.  The above formula demonstrates that as the cost of goods sold approaches zero, the gross profit margin approaches 100%.

When drawing conclusions about the relative performance of a company, benchmark comparisons should be made with competitors in the same industry.

### Example

Company A's balance sheet indicates revenues of \$29,611,000 and a cost of revenue (another name for cost of goods sold) of \$15,693,000.  Company A's gross profit margin would be:

= ((\$29,611,000 - \$15,693,000) / \$29,611,000) x 100
= (\$13,918,000/ \$29,611,000) x 100, or 47.0%