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PROFITABILITY RATIOS
GROSS PROFIT MARGIN RATIO

Introduction

Gross profit margin is one of three profitability ratios. Click on this link for an explanation of the difference between profit and profitability. The gross profit margin compares the gross profit figure with sales. The gross profit margin shows what percentage of the sales (or turnover) is gross profit.

Calculating Gross Profit Margin Ratio

Use the following method to work out the gross profit margin:


Gross Profit                 Gross Profit
Margin             =          _________      x 100%

                                    Turnover

Example Calculation

For example if my turnover is £10000 and my gross profit is £6000, I would use the following calculation to work out my gross profit margin

Gross Profit                 £6000
_________      =          _____              x 100   = 60%

Turnover                     £10000

 

This means that my gross profit margin is 60%, or to put it another way 60 percent of my money from sales is gross profit.

Conclusion

In the above example the gross profit margin is 60%. This sounds like a good profit but always remember that gross profit does not take all of a firm's costs into account. If there are other expenses (which were not included in the gross profit) this will reduce the amount of profit made by the firm.

 

 

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