A company’s Gross Profit Margin is a profitability ratio that measures its gross profit against its total revenues. A company’s gross profit is generally its net sales minus its cost of goods sold (COGS). The gross margin does not consider the business’ other income and expenses, such as its operating expenses.
The company calculates its gross profit margin as follows:
Gross Profit Margin = (Net Sales – COGS) / Net Sales
In contrast, a company’s operating profit margin uses the company’s net operating profit over net sales.
Example Calculation for Gross Profit Margin
Company A’s income statement shows the following revenue and expenses for the 2023 fiscal year.
The company wants to calculate its gross profit margin for the 2023 fiscal year.
The company calculates its gross profit margin (GPM) as follows:
GPM = (Net Sales – COGS) / Net Sales
GPM = ($500,000 – $140,000) / $500,000
GPM = 0.72
The company’s gross profit margin is 72%