Gross Profit Margin

Gross profit margin is a financial ratio that measures the percentage of revenue that exceeds the cost of goods sold (COGS). It shows how much of each dollar of revenue is left after covering direct costs and reflects a company’s efficiency in producing and selling its products. A higher gross profit margin indicates better operational efficiency and pricing power, allowing a company to retain more revenue as profit.

Example

If a company’s sales are $500,000 and its COGS is $300,000, the gross profit is $200,000, resulting in a gross profit margin of 40%, showing that 40% of sales revenue exceeds direct costs.