Gross profit margin

What is gross profit margin? Gross profit margin, also referred to as gross margin, is a measure of a company’s profitability. Gross profit margin indicates the amount of revenue remaining in a given [...]

What is gross profit margin?

Gross profit margin, also referred to as gross margin, is a measure of a company’s profitability. Gross profit margin indicates the amount of revenue remaining in a given accounting period after a company pays for labor and materials, otherwise known as cost of goods sold (COGS).

Deeper definition

A company’s gross profit margin is the most basic measure of a company’s profitability: how much money is left after accounting for the cost of producing goods and services and paying workers. Businesspeople and investors generally hope to see a stable or growing gross profit margin; when this measure is shrinking, either the business is investing in its operations or it has a problem.

Gross profit margin is computed by dividing the difference between total revenue and the cost of goods or services sold by total revenue, and is generally represented as a percentage.

Gross profit margin = (total revenue – cost of goods sold) / total revenue x 100

When calculating gross profit, costs related to selling, administration, taxes, and certain other expenses are excluded. Net income or net income margin represents the profits available from a business after all expenses have been accounted for. Operating margin calculations add in certain additional costs, excluding debt payments and taxes.

Not sure whether or not you’re pricing your products and services right? Find out your gross profit margin with this calculator.

Gross profit margin example

Brewing powerhouse Duff Beer reported $10 million in total revenue for the year of 2016, while its cost of goods sold was $9 million — including fixed costs, materials costs and labor costs. Using the formula given above, we can easily calculate Duff Beer’s gross profit margin:

($10 million – $9 million) / $9 million x 100 = 12.5 percent

Generally speaking, a beer company with a gross profit margin of 12.5 percent is considered financially healthy, although it’s worth noting that each industry has a different gross profit margin rate that’s considered positive.

More From Bankrate

  • Current Student Loan Interest Rates

    __BYLINE__ __INSERT-DATE__ Student loans can be a useful way to fill financial gaps in paying for higher education expenses. However, borrowing money for school comes at a cost, particularly in the form [...]

    8 MIN READ Nov. 13, 2020
    Placeholder image
  • Shop Through Chase Guide

    If you’re a savvy rewards card member on the hunt for points, chances are you’ve learned to maximize your reward categories in order to wring every point you can from your purchases. But unfortunately, [...]

    6 MIN READ Oct. 21, 2020
    Placeholder image
  • 7/1 ARM rates

    Today’s 7/1 ARM Rates The table below brings together a comprehensive national survey of mortgage lenders to help you know what are the most competitive 30-year mortgage rates. This interest rate table [...]

    1 MIN READ Sep. 22, 2020
    Placeholder image
  • The Best New Hampshire Home Insurance Companies 2021

    Few states can match New Hampshire’s natural beauty and charming New England architecture. Whether you live in a traditional Victorian home or a modern dwelling, you need adequate home insurance coverage. [...]

    5 MIN READ Feb. 12, 2020
    Placeholder image
  • Are credit card rewards taxable?

    The IRS generally doesn’t consider credit card rewards to be taxable income, but there are some exceptions.

    3 MIN READ Jan. 23, 2020
    Placeholder image
  • TEMP Popular Cards for Foreign Travel from our Partners

    Advertiser Disclosure: The credit card offers that appear on the website are from companies from which this site receives compensation. This compensation may impact how and where products appear on this [...]

    8 MIN READ Nov. 8, 2018
    Placeholder image
  • Best Credit Cards for Limited or No Credit

    Advertiser Disclosure: The credit card offers that appear on the website are from companies from which this site receives compensation. This compensation may impact how and where products appear on this [...]

    9 MIN READ May. 18, 2018
    Placeholder image