The most concise definition for gross profit margin is it measures the efficiency of the company’s production process. It shows the remaining sales revenue after subtracted by the production cost. These revenues usually used to pay general administrative expenses like salaries, marketing, and research and development. It is directly related to the company’s gain and management, thus, calculating gross profit margin is essential for investors.
The Importance
Investors, most of the time find difficulties to draw a linear comparison between companies before they decide to purchase shares of stock. Gross profit margin serves the assessment metric that helps the investor to draw better apples-to-apples comparison among companies.
The company which has the ability to increase its sustained gross profit margin higher than its competitor, most of the time has more efficient processes.
Besides, this company also has the tendency to run more effective overall operation. Thus, investing in that company will help you make a safer long-term investment.
The appropriate gross margin range for public companies is mostly available on the industry reports. You can get the reports from the research analysts, statistical services, rating agencies, or other financial data providers. Or else, you can also get it from a discount brokerage firm for free.
For instance, the largest broker, Charles Schwab & Company has a deal with the Swiss Bank, Credit Suisse. Then, the company’s clients can download and read the industry-specific financial report. Then, they can find a gross profit margin calculation.
Calculating Gross Profit Margin
To calculate the gross profit margin, you can use the following formula.
Gross profit margin= gross profit / total revenue
Meanwhile to find the company’s grow profit you can find the gross profit total from the company’s income statement. Then, subtract the line-item cost of goods sold.
That gives you the amount of the company’s revenue after it covered all of its production costs and before paying the administrative or other costs which do not directly affect the company’s production cost.
