Gross profit simply represents the difference between a business's revenues and the costs incurred to produce a good or provide a service. The gross margin, on the other hand, is the ratio between gross profit and net sales (the result is expressed as a percentage). It is a quick but useful tool to compare the performance of your company to the competition or to the average values of the sector. It can also be used to compare the current state of the company with its past performance, especially in markets where the price of products or services can fluctuate substantially.
Steps
Part 1 of 2: Calculate the Gross Margin
Step 1. Consider the net sales and the cost of goods sold
The corporate income statement indicates both figures.
Step 2. Gross Margin = (Net Sales - Cost of Goods Sold) ÷ Net Sales
Step 3. Example:
a company earns 4,000 euros from the sale of goods which cost 3,000 euros to produce. The gross margin is as follows: 4000−30004000 = 14 { displaystyle { frac {4000-3000} {4000}} = { frac {1} {4}}}
o 25%.
Parte 2 di 2: Capire i Termini
Step 1. Understand the gross margin (ML)
It represents the percentage of revenues that remain with the firm after incurring the direct costs of production. All other expenses (including shareholder dividends) are not included in this percentage. In this way the ML will be a good indicator of profitability.
Step 2. Define Net Sales
A firm's net sales are equal to total sales minus refunds, damages for damaged goods, and discounts. Compared to total sales alone, it is a more accurate tool for quantifying revenue.
Step 3. Measure the production costs of the goods sold
This figure includes the cost of raw materials, labor and other expenses directly related to the production of the goods or the provision of services. It does not include distribution costs, work not aimed at producing the goods or other indirect costs.
Step 4. Don't confuse gross profit with gross profit
Gross profit represents the difference between net sales and the cost of goods sold. It is expressed in euros or another currency. The formula indicated in the first section of the article is used to convert gross profit into gross margin, or a percentage, to facilitate the comparison between your business and the competition.
Step 5. Try to understand why these figures are so important
Investors consider gross margin to analyze the efficiency with which a firm uses its resources. If one firm has a 10% ML and another has a 20% one, the firm earns twice as much for every euro spent on production. Assuming that the other costs are more or less the same for the two companies, the second is a better investment.
