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Gross Profit Margin

First some basic profitability equations:

Remember:

Turnover = Sales

Gross Profit = Turnover - Cost of Sales

The gross profit margin ratio tells us the profit a business makes on its cost of sales, or cost of goods sold. It is a very simple idea and it tells us how much gross profit per £1 of turnover our business is earning.

Gross profit is the profit we earn before we take off any administration costs, selling costs and so on. So we should have a much higher gross profit margin than net profit margin.

Here are a few examples of the gross profit margins from different businesses:

See how the gross profit margins vary from business to business and from industry to industry. For example, the international airline has a gross profit margin of only 5.62% yet the accounting software business has a gross profit margin of 89.55%.

If a company's raw materials and factory wages go up a lot, the gross profit margin will go down unless the business increases its selling prices at the same time.

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