Gross profit: What It Is, How To Calculate It Using The Formula

Subtract the COGS, operating expenses, other expenses, interest, and taxes from its revenue to calculate a company’s net profit margin. Then divide this figure by the total revenue for the period and multiply by 100 to get the percentage. This is its gross revenues minus returns, allowances, and discounts. Then divide this figure by net sales to calculate the gross profit margin as a percentage. Gross profit margin is a financial metric used by analysts to assess a company’s financial health. It’s the profit remaining after subtracting the cost of goods sold (COGS).

• It can also be referred to as net sales because it can include discounts and deductions from returned merchandise.
• In a given month, the store generates $50,000 in revenue from sales.
• A key measure of efficiency, gross profit measures the profit a business makes after subtracting the cost of goods sold (COGS) from the total revenue.
• Let’s assume a company generates $500,000 in revenue and incurs $300,000 in direct costs (COGS).
• It’s used to assess how well a company manages its production and labor costs.
• Overall, these terms are primarily differentiated by the adjectives that precede them.
• Both gross profit and net profit are useful measures for businesses, and they serve different purposes.

Private Equity and Other Business-based Investments

Free accounting tools and templates to help speed up and simplify workflows. Inventoriable costs are not immediately assigned to the cost of gross profit goods sold. First, you need to break down all of your costs and determine which category they fall under.

Gross Profit Margin vs. Other Margins

There are exceptions whereby a portion of depreciation could be included in COGS and ultimately impact gross profit margin. Gross profit is a company’s earnings after deducting the Cost of Goods Sold (COGS). In other words, it’s your retained revenue after incurring the total cost it takes to produce and sell your product or service. However, gross profit doesn’t account for your operational expenses.

Where is gross profit on the income statement?

Gross Profit is a key measure of a company’s production efficiency and pricing strategy, as it shows how well the company is managing its production costs relative to its sales. It’s smart for investors to look at key financial metrics so they can make well-informed decisions about the companies they add to their portfolios. One important metric is the gross profit margin which you can calculate by subtracting the cost of goods sold from a company’s revenue. Calculating gross profit is a crucial step in assessing the financial health of a business.

Operating Profit

Net earnings are then used to calculate a company’s earnings per share (EPS), which portrays a company’s earnings based on the number of publicly traded equity shares it has outstanding. For some QuickBooks companies, markups and efficiency are so high that there isn’t much of a difference between revenue and profit. For other, more capital-intensive businesses, a net profit of 2% or 3% is a good year. Unlike software and related services — which represent sources of recurring revenue — hardware products are one-time purchases.

Your company’s gross profit considers your revenue and direct costs related to your product, while net profit measures how much money your business makes overall. Similarly to gross margin, gross profit helps you understand how efficiently you’re producing your product or service. It also gives you guidance on how much you can afford to spend on operating expenses to grow your business.

• Negotiating better terms with suppliers to obtain cost savings on raw materials and components can reduce COGS and increase profit margins.
• Gross profit margin indicates the proportion of revenue that remains as gross profit after deducting the cost of goods sold (COGS).
• Gross profit and EBITDA are both profitability metrics, but they measure different parts of a business’s financial performance.
• A high gross margin can also imply that the company would be able to lower prices but still remain profitable.
• For a SaaS business, sales revenue (or net sales) typically includes income from subscription fees and other add-on features.

Consider a quarterly income statement where a company has $100,000 in revenues and $75,000 in cost of goods sold. The calculation would not include selling, general, and administrative (SG&A) expenses. The $100,000 in revenues would subtract $75,000 in cost of goods sold, giving the company a total of $25,000 in gross profit.