What is Gross Profit Margin?

Gross profit margin compares gross profit to sales revenue. It shows how much a business is earning, taking into account the needed costs to produce its goods and services. A high gross profit margin ratio reflects a higher efficiency and vice versa. Business owners are always looking to improve their gross profit margins i.e they want to decrease their cost of goods sold while increasing sales revenues.

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Gross margin percentage is gross profit divided by total revenue. It is calculated by subtracting the cost of goods sold from revenue and then dividing the result by revenue to produce a percentage. Gross margin percentage is an indicator of how profitable or efficient the company is at its most basic level, before subtracting sales, administrative and other business operating costs. The equation is: (Revenue - COGS)/Revenue = Gross margin percentage. It measures how much an organization earns after taking into account the direct costs required to produce its products or deliver its services.