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How to Calculate Gross Profit Ratio

January 15, 2024 by admin Category: How To

You are viewing the article How to Calculate Gross Profit Ratio  at Tnhelearning.edu.vn you can quickly access the necessary information in the table of contents of the article below.

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This article was co-written by Michael R. Lewis. Michael R. Lewis is a retired Texas executive, entrepreneur and investment advisor. He has over 40 years of experience in Business & Finance, including the position of Vice President of Blue Cross Blue Shield of Texas. He holds a BBA in Industrial Management from the University of Texas at Austin.

This article has been viewed 98,545 times.

Gross profit margin is a fairly simple comparison between the cost of goods your company sells and the income from these products. Gross profit margin is the ratio of gross profit to total sales expressed as a percentage. It is a quick and useful way to compare your company with your competitors or the industry average. It can also be used to compare your company’s current state with past performance, especially in a market where the value of your merchandise can fluctuate significantly.

Table of Contents

  • Steps
    • Calculate gross profit margin
    • Understanding the terms

Steps

Calculate gross profit margin

Image titled Calculate Gross Profit Margin Step 1

Image titled Calculate Gross Profit Margin Step 1

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Find Net Sales and Cost of Goods Sold. The company’s income statement listing will show two values.
Image titled Calculate Gross Profit Margin Step 2

Image titled Calculate Gross Profit Margin Step 2

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Gross Profit Margin = (Net Sales – Cost of Goods Sold) ÷ Net Sales.
Image titled Calculate Gross Profit Margin Step 3

Image titled Calculate Gross Profit Margin Step 3

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For example. A company that makes $4,000 from selling goods costs only $3,000 to produce. Gross profit margin will be 4000−30004000=first4{displaystyle {frac {4000-3000}{4000}}={frac {1}{4}}}{frac {4000-3000}{4000}}={frac {1}{4}} , or 25%.

Understanding the terms

Image titled Calculate Gross Profit Margin Step 4

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Image titled Calculate Gross Profit Margin Step 4

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Understand Gross Profit Margin. Gross Profit Margin (Gross Profit) is the percentage of a company’s remaining revenue after the cost of producing goods has been paid. [1] X Source of Research All other expenses (including shareholder dividends) need to be the result of this percentage. This makes Gross Profit a pretty good indicator of profitability.
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Image titled Calculate Gross Profit Margin Step 5

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Determine Net Revenue. The company’s net sales are equal to total sales minus profits, allowance for damaged goods, and discounts. [2] X Source of Research This is a more accurate measure of revenue than just total sales.
Image titled Calculate Gross Profit Margin Step 6

Image titled Calculate Gross Profit Margin Step 6

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Calculation of Cost of Goods Sold. Abbreviated as GVHB, this figure includes the cost of materials, labor, and other costs directly related to the production of the good or service. [3] X Source of Research It does not include distribution costs, labor unrelated to the production of the good, or other indirect costs.
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Image titled Calculate Gross Profit Margin Step 7

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Avoid confusion between Gross Profit and Gross Profit. Gross Profit is Net Sales minus Cost of Goods Sold. It is expressed in dong or other currency. The above formula converts Gross Profit to Gross Profit, as a percentage, so that you can easily compare it with another company.
  • Image titled Calculate Gross Profit Margin Step 8

    Image titled Calculate Gross Profit Margin Step 8

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    Understand why these numbers are so important. Investors refer to Gross Profit Margin to find out how efficiently a company is using its resources. If the first company has a Gross Profit margin of 10% and the second company is 20%, the second company earns more for every dollar they spend on goods. Assuming all other costs between the two companies are fairly equal, the latter would be a better investment opportunity.

    • It’s best to compare companies in the same industry. Some goods and services have lower average profit margins than others.
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    This article was co-written by Michael R. Lewis. Michael R. Lewis is a retired Texas executive, entrepreneur and investment advisor. He has over 40 years of experience in Business & Finance, including the position of Vice President of Blue Cross Blue Shield of Texas. He holds a BBA in Industrial Management from the University of Texas at Austin.

    This article has been viewed 98,545 times.

    Gross profit margin is a fairly simple comparison between the cost of goods your company sells and the income from these products. Gross profit margin is the ratio of gross profit to total sales expressed as a percentage. It is a quick and useful way to compare your company with your competitors or the industry average. It can also be used to compare your company’s current state with past performance, especially in a market where the value of your merchandise can fluctuate significantly.

    Thank you for reading this post How to Calculate Gross Profit Ratio at Tnhelearning.edu.vn You can comment, see more related articles below and hope to help you with interesting information.

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