What Is Gross Profit on Sales?

Gross profit is a profitability measure.

Corporate finance specialists compute a firm's gross profit on sales, or gross profit, to gauge the company's ability to generate revenues in the short term. A lender or supplier may calculate gross profit to evaluate a firm's financial solidness.

Definition

Gross profit on sales equals total sales revenue minus the cost of goods sold. The cost of goods sold includes raw materials expenses and the manufacturing cost of finished products. For instance, a company's sales revenue for a month amounts to $2.5 million. The cost of goods sold amounts to $1.5 million. The monthly gross profit equals $1 million ($2.5 million minus $1.5 million).

Financial Analysis

Gross profit is an important indicator because it provides insight into a corporation's dexterity in generating revenues and improving liquidity levels in the short term. A lender or supplier may review a company's gross profit and compare it to its working capital to gauge the firm's economic robustness. Working capital is a measure of short-term cash availability and equals current assets minus current liabilities.

Misconceptions

Gross profit is different from gross margin, although both concepts are interrelated. Gross margin equals gross profit divided by sales revenue.

References

• Understanding Accounting: Inventory and Costs of Goods Sold
• Investopedia: Gross Profit Margin