How to Define Gross Profit Percentage

Calculating gross profit percentage

The gross profit percentage is one of several key measurements a company uses in evaluating its financial performance. It helps a company to see what percentage of its earning after costs (for products and/or services) is profit. A higher gross profit percentage is generally preferred as it provides the company with financial resources to pay for research, product development, and other costs associated with running and growing a business. A company that has little gross profit has limited resources.

Instructions

1. Calculate gross profit by taking total gross or sales revenue, minus total sales costs or cost of goods. If you sell your product for $10 and it costs you $4 to manufacture (known as cost of goods) or $4 to buy wholesale, your gross profit is $6.

2. Divide your gross profit by your gross sales revenue to get your gross profit percentage. Using the example in Step 2, you would divide your gross profit of $6 by your revenue of $10, for a 60 percent gross profit.

3. Note that the gross profit percentage is profit before operating expenses, such as paying salaries and turning on the lights.

References

• Investopedia: Understanding Profitability Ratios

Resources

• Read this Article in Spanish