Definitions The gross profit ratio is the gross profit expressed as a percentage of total sales. Gross profit is taken before tax and other indirect costs.
The gross profit ratio tells us how the company's gross profits relate to their sales. Different industries have fundamentally different gross profit ratios. The gross profit ratio can tell us about the nature of the industry the company is operating in as well as serving to compare past performances of a company.
The Gross Profit Ratio Formula
The formula for the net profit ratio is as follows:
Gross Profit Ratio (%) = (Gross Profit / Total Revenues) x 100. ( Article continues below)
Get more background about gross profit and the gross profit ratio with this useful video, which introduces many concepts relating to the income statement.
Example: Calculating the Gross Profit Ratio
Let us consider an example where a local builder, over the period of 1 year, produces the following results:
- Sales of: $4 million
- Cost of sales: $3.0 million
- Employee costs: $0.5 million
- Other costs: $0.2 miillion
- Gross profit: $1 million (4 - 3)
In this case we can calculate the net profit ratio to be 25.0%. ((1 / 4) * 100).
