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# What is Gross profit ratio analysis?

Gross profit is based on sales or total turnover of the business operations. It is an indicator of basic profitability.

## Meaning

Gross profit or margin is the profit of a business to its revenue. It is revenue is converted into GP i.e. revenue less cost of goods sold.

It is the amount of revenue that a company brings in before subtracting the expenses associated with that revenue. It is reported on the classified income statement. It’s different from operating profit, which is actually gross profit minus operating expenses. It’s also different from net profit, which is operating profit minus taxes and interest.

In accounting, It is the difference between revenue and the cost of making a product or providing a service, before deducting overhead, payroll, taxation, and interest payments. It is different from operating or net profit.

## Gross profit Formula

The formula of GP is as follows:

GP = Sales – Cost of goods sold (or Cost of sales)

GP= Sales Revenue – Cost of Goods Sold

## Example:

From the following information of Goodwill Company, Compute the GP and  Calculate Gross Profit Percentage of the company.

Gross profit is equal to net sales minus cost of goods sold. The information about gross profit and Gross sales is normally available from income statement of the

company.

Gross profit explains user of financial statement how much money a company earned on sales compared to the expenses directly related to creating the good, such as raw materials expenses. In this calculation do not include related expenses such as rent, salaries, interest, research and development, income taxes, etc. that are not directly related to the product.

Computation of gross profit ratio as follows:

Gross profit ratio = gross profit/net sales

= (336,900 / 10, 40,000)

= 0.323 or 32.39%

GP ratio is shows that the relationship between gross profit and sales revenue in a year. It is a tool to evaluate the operational performance of the business.

Gross Profit Margin Ratio  is important financial technique for any business. It should be adequate to cover all operation cost and provide for profit. It can be used to calculate Net Profit Margin Formula also.

There is no mandatory standard is prescribed to interpret gross profit and its ratio. Generally, a higher ratio better it is. The gross profit can be compared it with last years’ profit and with the profit of other companies in the industry. This is because to know whether it is growth status or not. While making such comparison to consider the accounting policies and other norms are in practice is followed uniformly.

Source: accountingweb.org
Category: Forex