Gross profit margin is a financial metric that represents the percentage of revenue retained by a company after deducting the cost of goods sold (COGS). It is a key indicator of a company’s profitability and efficiency in managing its production costs.
The formula for Gross Profit Margin is:
Gross Profit Margin = ((Revenue−Cost of Goods Sold) / Revenue) × 100%
In this formula, “Revenue” refers to total sales or revenue generated by the sale of goods, and “Cost of Goods Sold” includes all direct costs associated with producing or purchasing the goods sold.
A higher gross profit margin indicates that a company is able to produce goods at a lower cost relative to its revenue, which can be a positive signal for investors and stakeholders. It’s important to note that the gross profit margin does not account for other operating expenses like selling, general, and administrative costs.