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All trading basics

Gross Profit Margin

Gross Profit Margin = (Revenue - Cost of Goods Sold) ÷ Revenue

Indicates what the company's pricing policy is and what the true mark-up margins are.

Things to remember

  • The results may be skewed if the company has a very wide range of products.
  • This ratio is very useful when compared over several years.
  • A 33% gross margin means products are marked up 50%.
Income Statement

For Cory's Tequila Co. ($12,154 - 4,240) ÷ $12,154 = 0.65

Gross Profit Margin Analysis:

The gross margin is not an exact estimate of the company's pricing strategy but it does give a good indication of financial health. Without an adequate gross margin, a company will be unable to pay its operating and other expenses and build for the future. Cory's Tequila Co. has a gross margin of 65% therefore their mark-up is over 100% of the cost. In general, a company's gross profit margin should be stable. It should not fluctuate much from one period to another, unless the industry it is in has been undergoing drastic changes which will affect the costs of goods sold or pricing policies.