Gross profit on income statement is the company’s revenue from its sales subtracted by the cost of goods sold. It tells you, the amount of profit the company makes if it did not pay other expenses, like salaries, water, electricity, rents, and other things. Knowing a company’s gross profit can help you value a company or also calculate other financial ratios.
Yet, in gross profit, we do not include items like interest paid on debts or loans, depreciation, or taxes, unlike in the net profit.
Finding the Gross Profit on the Income Statement
Do not worry, to find gross profit is not like searching for a needle in a haystack. The regulation requires the company to broke it down and label it clearly. Thus, you will not miss it.
Calculating Gross Profit
To calculate gross profit, you just need to subtract the cost of the goods sold from the company’s revenue.
Gross Profit = Total revenue – Cost of Goods Sold
Importance of Gross Profit
You can’t decide if a stock is a good investment or bad investment solely on gross profit. Yet, you can calculate gross margin, by using gross profit.
Is it Always Calculated the Same Way?
Accounting rules have allowed the company’s management to have a lot of discretion. Consequently, executives get a lot of leeways to determine the expenses that should be written as the cost of goods sold.
That means you can find two companies with significantly different levels of gross profit on the same amount of sales.
That can be the result of the management team deciding that a particular expense goes to a cost of goods sold, while other management teams put it in selling, general, or administrative expenses. When it happens, it is not something bad or evil.
Yet, it can be a problem since you can find two identical companies reporting a significantly different gross profit. Thus, it is hard to find an apples-to-apples comparison of companies.
