What is gross profit margin?
Gross profit margin is a type of profit margin that is used to measure a company’s profitability in relation to sales and is expressed as a percentage. It is a ratio of gross margin, or gross margin, to revenue, and measurement is a way to assess a company’s ability to generate revenue from its sales after deducting costs. production costs.
What does the gross profit margin tell investors?
Investors use gross profit margin to assess how the management of a business is effectively and efficiently generating profits from sales. In general, the higher the margin, the more profitable the business. The two main components are the revenues and costs associated with the production of goods and services (also known as cost of sales or cost of goods sold). High costs are likely to reduce profitability, while low costs can help boost profitability. At the same time, if costs stay the same from quarter to quarter, an increase in sales can help increase revenue, while a decrease in sales could reduce them.
How to calculate gross profit margin
Gross margin is calculated by dividing gross margin (revenue minus cost of sales) by revenue. Gross margin and revenue appear at the top of a company’s income statement. For publicly traded companies, financial statements are filed quarterly and annually with the Securities and Exchange Commission.
How to interpret gross profit margin (example: Apple)
Below is an example of Apple’s sales and cost of sales for fiscal years 2017 to 2021. (Note: Apple’s fiscal years end around the end of September, compared to the typical January-December period. for many companies.) Gross profit margin held stable from 2017 to 2020, but recovered in 2021 as Apple’s net sales grew faster than its cost of sales. The data suggests that even though sales faltered from 2017 to 2020, senior management kept production costs under control and maintaining these expenses through 2021 helped increase the company’s gross profit margin.
| Apple | September 25, 2021 | Change (year to year) | September 26, 2020 | Change (year to year) | September 28, 2019 | Change (year to year) | September 29, 2018 | Change (year to year) | September 30, 2017 |
|---|---|---|---|---|---|---|---|---|---|
|
Net sales |
|||||||||
|
Some products |
297,392 |
35% |
220 747 |
3% |
213 883 |
-5% |
225,847 |
15% |
196,534 |
|
Services |
68,425 |
27% |
53 768 |
16% |
46,291 |
16% |
39,748 |
22% |
32,700 |
|
Total net sales |
365 817 |
33% |
274,515 |
6% |
260 174 |
-2% |
265,595 |
16% |
229,234 |
|
Cost of sales |
|||||||||
|
Some products |
192 266 |
27% |
151,286 |
4% |
144,996 |
-2% |
148 164 |
17% |
126,337 |
|
Services |
20,715 |
13% |
18,273 |
9% |
16 786 |
8% |
15,592 |
6% |
14,711 |
|
Total cost of sales |
212,981 |
26% |
169,559 |
5% |
161,782 |
-1% |
163,756 |
16% |
141,048 |
|
Gross margin |
152,836 |
46% |
104,956 |
seven% |
98,392 |
-3% |
101 839 |
15% |
88 186 |
|
Gross margin |
48% |
38% |
38% |
38% |
38% |
||||
TheStreet Dictionary Terms
What are the limits of the gross profit margin?
Gross profit only measures major items and does not show exposure to other costs such as operating expenses, tax payments, and interest charges. Focusing on sales and cost of sales has limited scope, but using it in conjunction with other profitability ratios could provide a larger picture of a company’s ability to generate profit.
The other two profit margins related to gross profit margin are operating profit margin and net profit margin. Together, these three types of profit margin focus on the income statement items and how sales and associated costs generate profit.
Frequently Asked Questions (FAQ)
Below are answers to some of the most frequently asked questions by investors about gross profit.
How does gross profit margin differ from gross margin?
The gross profit margin takes the gross margin, which is the cost of sales minus the revenue, and divides it by the revenue. It expresses the gross margin over sales as a ratio.
What is a good profit margin?
A recent study showed that for companies with market capitalizations over $ 1 billion, the average gross profit margin was 42%. Being at or above this average would be considered good.
