Home Investing Dictionary Investment Formula Gross Profit Margin
Gross Profit Margin
Written by Kenny Foo   
Tuesday, 03 March 2009 10:22

Investment Formula Description

Gross profit margin or gross margin is investment formula to assess the profitability of a corporation's core activities , excluding fixed costs, which commonly tends to be time-related, such as salaries or rentals being paid per month.

Basically, gross profit margin are what remains from sales after a company pays out cost of goods sold ( COGS ). Gross profit margin or gross margin serves as the income for paying additional expenses like taxes, rentals and future savings . A corporation that has higher gross profit margin or gross margin  than its competitors in the same industry is more efficient and investors tend to pay more for business that have higher efficiency ratings than their competitors. Gross profit margin or gross margin are related with profit margin and it is common to use both together.

Investment Formula

Gross Profit Margin or Gross Margin = (RevenueCost of Goods Sold ) / Revenue X 100 = Gross Profit / Revenue X 100

Investment Formula Example

Corporation A has $10,000 revenue with $5,000 of cost of goods sold ( COGS ) and $ 2,000 for overhead such as taxes, rentals and salaries. The Gross profit and Gross profit margin calculations are as following.
Gross Profit = Revenue - Cost of Goods Sold ( COGS ) = 10,000 - 5,000 = $5,000

Unlike net profit, fixed cost such as taxes, rentals, salaries is not deducted from Revenue for Gross Profit.

Gross Profit Margin or Gross Margin = Gross Profit / Revenue X 100 = 5,000 / 10,000 X 100 = 50%

Corporation A has 50% of Gross Proft Margin or $5,000 of gross profit, which means it can use these gross profit to pay for fixed costs such as salaries, rentals and etc or use these gross profit for future savings.

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Last Updated ( Wednesday, 04 March 2009 15:01 )
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