What is Gross Profit?

Gross profit is that the profit a corporation makes after deducting the prices related to making and selling its products, or the prices related to providing its services. The gross profit margin will appear on a company's earnings report and may be calculated by subtracting the value of products sold (COGS) from revenue (sales). These figures are often found on a company's earnings report.

Gross profit can also be mentioned as sales profit or gross income.

Understanding gross profit margin

The metric mostly considers variable costs that’s, costs that fluctuate with the extent of output, such as:

  1. Materials
  2. Direct labor, assuming it's hourly or otherwise hooked in to output levels
  3. Commissions for staff
  4. Credit card fees on customer purchases
  5. Equipment, perhaps including usage-based depreciation
  6. Utilities for the assembly site
  7. Shipping

Why does gross profit margin Matter?

Gross profit is employed to calculate gross profit margin which is calculated by simply dividing gross profit by total revenue (gross profit / total revenue). Calculating gross profit margin allows you to match similar companies to every other and to the industry as an entire to work out relative profitability.

Companies with higher gross profit margin margins have a competitive edge over rivals, whether because they will charge a better price for good/services as reflected in higher revenues or because they pay less for direct costs as reflected in lower costs of products sold.

Limitations of Using gross profit margin

These statements conveniently display gross profits as a separate item, but they're only available for public companies.

Investors reviewing private companies' income should familiarize themselves with the value and expense items on a non-standardized record that do and do not factor into gross profit margin calculations.