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Gross profit margin definition
Gross profit margin is the share of revenue a company keeps after subtracting the direct cost of producing its goods or services, expressed as a percentage. It is also called gross margin.
It is calculated as gross profit divided by revenue, multiplied by 100, where gross profit is revenue minus cost of goods sold (COGS). A higher gross profit margin means the company retains more of each sale before operating expenses, interest, and tax come out, and a falling margin can signal rising input costs, discounting, or weaker pricing power.
Gross profit margin sits at the top of the profitability stack and counts only direct production costs. Operating margin goes a step further by also deducting operating expenses such as wages and rent, and net profit margin deducts everything, including interest and tax, to show the final profit on each unit of revenue.
Gross profit margin Example
A company reports USD 500,000 in revenue and USD 300,000 in cost of goods sold.
Gross profit is:
USD 500,000 - USD 300,000 = USD 200,000
Gross profit margin is:
USD 200,000 √∑ USD 500,000 √ó 100 = 40%
A 40% gross profit margin means the company keeps USD 0.40 of gross profit for every USD 1.00 of revenue.
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