Gross profit ratio

Gross profit divided by total sales of goods and/or services.

Gross profit indicates how much profit is made after paying for the cost of goods sold (the direct costs attributable to the production of goods and supplies such as inventory and stock). The gross profit ratio, also known as gross margin, represents gross profit expressed as a percentage of income from sales and services. Gross profit ratios vary by industry and business. The higher the gross profit margin, the more efficient a business is. A low gross profit ratio may indicate that a business is not charging enough for its products and services, or is paying too much for its supplies and stock.

Note: Gross profit ratios are only calculated for industries in manufacturing, wholesaling, retailing and food services, as these commonly have traded stock.