What is Gross Profit Ratio
Gross profit ratio is a financial ratio that measures the company’s profitability by evaluating the profit the company generates after deducting its cost of sales. The gross profit ratio is a comparison between a company’s gross profit and net sales. The gross profit ratio (GPR) reflects the number of dollars that the company generates for each $1 of net sales.
The gross profit ratio (GPR) measures how efficiently a company is selling its goods or services. This helps the managers and investors to view how the company manages its cost.
The higher the gross profit ratio (compared with the industry average or historical data) the more profit after the cost of sales that the company generated. However, a low GPR ratio is not always a bad sign because the different business has different level of costs. Thus, a 5% gross profit ratio may be a low level
To put it simply, the stakeholders expect a stable or growing gross profit ratio. In the same way, the actually bad gross profit ratio for the managers and investors is the ratio that shrinking which indicates the company’s ability to manage its costs is unstable.
Gross Profit Ratio Formula
The gross profit ratio can be calculated by dividing the gross profit by the net sales (and multiplier by 100 to express it as a percentage) as the following gross profit ratio formula:
Gross Profit Ratio = (Gross Profit / Net Sales) x 100
where
Gross Profit is deducted from the net sales by the cost of goods sold (also known as COGS or cost of sales) as the following equation: Gross Profit = Net Sales – Cost of Goods Sold
For example, the Feriors company limited has a gross profit of $400,000 and net sales of $900,000 in the last accounting year. The gross profit ratio will be: (400,000 / 900,000) x 100 = 44.44%
A gross profit ratio is 44.44% means the company generates 44.44 cents of gross profit for each $1 of net sales.
Frequently Asked Questions
The gross profit ratio is a financial ratio that measures the company’s profitability by evaluating the profit the company generates after deducting its cost of sales.
The gross profit ratio can be calculated by dividing the gross profit by the net sales as the following formula: Gross Profit Ratio = (Gross Profit / Net Sales) x 100
A stable or growing number is a good gross profit ratio. The higher the gross profit ratio compared with the industry average or historical data means the more profit after the cost of sales that the company generated.
