As determined previously, PG’s gross margin for the quarter that ended on March 31, 2025, was 50.98%. Companies can use gross margin as a guideline to improve their operations and adjust pricing strategies. It’s useful for evaluating the strength of sales compared to production costs. A declining margin may point to rising input costs, increased discounting, or operational challenges. A negative margin means you’re losing money on every sale before even considering your other operating expenses. Markup shows profit as a percentage of the cost of goods sold (COGS).

Your sale price

Selling products at a premium typically increases gross margins. Gross profit margin is this profit expressed as a percentage. Gross profit is a company’s total profit after deducting the cost of doing business, specifically its COGS. The gross margin can also provide insights into which products and services are the most efficient to produce and sell, as well as where to make cost improvements. To interpret this ratio, you can conduct a long-term analysis of the company’s gross margin trends over time or draw comparisons between peers and the sector average.

• While higher margins generally indicate efficient operations, what qualifies as “good” varies greatly across sectors.
• The more efficient production, the higher the margins.
• Gross profit margin shows whether the business is becoming more or less profitable per dollar of revenue.
• Ready to dive deeper into financial ratios?
• Gross margin shows how efficiently a business converts revenue into profit after covering direct production or service costs.

Enter the revenue earned from a particular product or service and the costs of providing that product or service (known as cost of goods sold). Xero serves up the numbers you need to track profits and manage your margins. One of the main jobs of a professional financial analyst is to analyze the P&L of a company in order to make recommendations about the financial strength of the company, attractiveness of investing in it, or acquiring the entire business. A company’s statement of profit and loss is portrayed over a period of time, typically a month, quarter, or fiscal year. These industries typically have lower direct costs relative to their revenue, allowing them to keep more of each dollar earned. A margin that allows your business to cover all expenses, invest in future growth, withstand economic downturns, and provide returns to stakeholders is fundamentally solid, whether it’s 5% or 50%.

Gross margin expresses that same profit as a percentage of revenue, making it easier to compare performance across time periods or businesses. Tracking gross margin by product or service reveals which offerings truly drive profitability. One of the most frequent gross margin mistakes is failing to include all direct costs in cost of goods sold (COGS). Even profitable businesses can misunderstand or miscalculate gross margin.

For example, tariffs on imported goods can increase the COGS, reducing the gross profit. However, disruptions or inefficiencies can inflate COGS and narrow the gross margin. It provides a more standardized measure of profitability, allowing for easy comparison between companies of different sizes or industries.

Irrespective of the differences in operating expenses (OpEx), interest expenses, and tax rates among these companies, none of these differences are captured in gross margin. The difference between the gross margin and net profit margin pertains to the type of expenses deducted from the profit metric. However, a credible analysis of a company’s gross margin is contingent on understanding its business model, unit economics, and specific industry dynamics. Therefore, the 20% gross margin implies the company retains $0.20 for each dollar of revenue generated, while $0.80 is attributable to the incurred cost of goods sold (COGS). The formula to calculate the gross margin is equal to gross profit divided by net revenue.

A sudden surge in commodity prices can squeeze the gross margin if companies can’t pass those cost increases onto consumers. By cutting down on unnecessary expenses, like paying for personal credit cards, businesses can increase the company gross and overall profitability. By streamlining processes with a data-driven approach, businesses can bolster their gross margin in terms of reducing costs and improving productivity levels overall.

• In this KPI glossary entry, we’ll break down exactly what gross profit margin is, how it differs from gross profit, and why it matters so much in financial analysis.
• Regular reviews and accurate financial statement reporting are important practices for you to make decisions and drive improvements based on reliable data.
• As a guide, a good gross profit margin might range from 50–70% for service businesses and 20–40% for product-based businesses.
• As determined previously, PG’s gross margin for the quarter that ended on March 31, 2025, was 50.98%.
• It often requires pulling figures from multiple financial statements and calculating the result manually.
• Understanding different profit margins helps you analyze your business at multiple levels.

Gross profit margin is the first of the three major profitability ratios. But if we compare the ratios between McDonald’s and Wendy’s (two companies operating in the fast-food industry), then we can get an idea of which company enjoys the most cost-efficient production. A low gross margin ratio does not necessarily indicate a poorly performing company.

Gross margin helps a company assess the profitability of its manufacturing activities. A company’s net margin takes all of a business’s expenses into account. Gross margin 5 things a comptroller does focuses solely on the relationship between revenue and COGS, but net margin or net profit margin is a little different. The gross profit is, therefore, $100,000 after subtracting its COGS from sales. It shows how efficiently a business turns revenue into profit before accounting for overhead and other expenses. For instance, the operating profit margin, which accounts for COGS and OpEx, is 20% for Company A, 35% for Company B, and 5% for Company C.

Operating Profit Margin

Markup is expressed as a percentage. Read on to learn what is markup, find out how to calculate it, and see examples of markup pricing. If you want to make a profit, you need to mark up your products. Company ABC is looking to increase its bottom line and determines that the simplest ways to do so are to sell more cheaply made lamps or to increase prices.

Revenue Optimization

It measures the percentage of revenue remaining after covering the cost of goods sold (COGS). You could be selling like crazy and still face financial struggles if your margins are off. It represents the percentage of net revenue you make that exceeds the cost of goods sold (COGS). This free resource covers 30+ essential metrics that will strengthen your ability to assess a company’s financial health. Financial analysts use financial ratios to track a company’s financial performance over time, benchmark against peers, and support investment or credit decisions. Financial ratios are calculations that compare financial statement numbers to evaluate liquidity, leverage, efficiency, profitability, and market value.

Others will attempt to increase margins by setting higher prices, and marketing value adds. The higher the margins, the healthier the company. Minor changes in gross margin can highlight problems in the supply chain. As companies create their products or services, they incur costs. Gross margin is the result of subtracting the cost of goods sold from net sales.

Margin is smaller than the markup

A decline in gross margin may indicate inefficiencies. If income statements are available on a monthly or quarterly basis, compare the gross margin figures. Gross margins can serve as a measure of company efficiency.

Compare

Let’s assume that the cost of goods consists of the $100,000 it spends on manufacturing supplies. Costs are subtracted from revenue to calculate net income or the bottom line. It can also be referred to as net sales because it can include discounts and deductions from returned merchandise. He has over 40 years of experience in business and finance, including as a Vice President for Blue Cross Blue Shield of Texas. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.

As a guide, a good gross profit margin might range from 50–70% for service businesses and 20–40% for product-based businesses. A higher gross profit margin means your business operates more efficiently and has more funds available for growth. Gross profit margin measures the percentage of sales revenue that exceeds your cost of goods sold (COGS). Learn how the gross profit margin formula helps you price right and boost profit.

Your gross profit margin needs to cover the costs of selling your products or services (your COGS) and other costs like operating expenses and taxes. The Gross Margin Ratio, also known as the gross profit margin ratio, is a profitability ratio that compares the gross margin of a company to its revenue. Since only direct costs are accounted for in the metric, the gross profit margin ratio reflects the income available for meeting fixed costs and other non-operating expenses.