Gross Profit Margin

Gross Profit Margin is a financial metric that shows the percentage of Revenue that exceeds the Cost of Goods Sold (COGS). It is calculated by subtracting COGS from total Revenue and then dividing that figure by total Revenue. This ratio is a key indicator of a company’s financial health and efficiency in managing production costs.

Formula:

Gross Profit Margin = (Total Revenue – Cost of Goods Sold) / Total Revenue × 100

Example 1: If a company has total Revenue of $500,000 and COGS of $300,000, the Gross Profit Margin would be:

(500,000 – 300,000) / 500,000 × 100 = 40%

Example 2: A retail business generates $1,000,000 in sales and incurs $600,000 in COGS. The calculation would be:

(1,000,000 – 600,000) / 1,000,000 × 100 = 40%

Case: A tech startup sells software for $200,000 and has COGS of $80,000. The Gross Profit Margin would be:

(200,000 – 80,000) / 200,000 × 100 = 60%