# How to calculate gross margin

Gross profit is a fairly simple indicator showing the difference between the proceeds from the sale of goods and their cost. Gross profit ratio is the ratio of gross profit to total revenue, expressed as a percentage. Gross profit margin is a quick and useful way to compare the performance of a particular company and the performance of other companies in a specific industry. This coefficient can also be used to compare the current and past state of the company – in particular, it is useful for companies operating in markets where prices for goods vary significantly.

Method

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Gross margin calculation

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Find out the net profit from sales and the cost of goods sold. In the accounting reports (namely, in the profit and loss statement of the company) you can find all the necessary values.

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Gross profit ratio = (Net sales revenue – Cost of goods sold) ÷ Net sales revenue.

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Example. The company sells goods for $ 4,000, the production of which costs $ 3,000. The company’s gross profit ratio is {\ displaystyle {\ frac {4000-3000} {4000}} = {\ frac {1} {4}}} {\ frac {4000-3000} {4000}} = {\ frac {1 } {4}}, that is, 25%.

What are the indicators

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What does gross margin mean? The gross profit ratio (KVP) is a percentage of the profit of the company, which remained after direct costs for the production of goods. [1] All other expenses (including dividends of shareholders) are not taken into account in this indicator. All this makes KVP a good indicator for evaluating the profitability of a business.

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Determination of net sales revenue. The company’s net sales revenue is calculated as the total sales revenue minus the cost of returned goods, damaged goods and discounts. [2] This indicator is a more accurate way to measure the amount of revenue from the sale of goods than the total revenue from sales.

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Measurement of the cost of goods sold. The cost of goods sold means the cost of materials, labor and other expenses directly related to the production of goods or services. [3] The cost does not include the cost of distribution of goods, the cost of labor that is not directly involved in the production process, as well as any other indirect costs.

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Do not confuse gross margin and gross margin. Gross profit is calculated as the difference in net sales revenue and cost of goods sold. Gross profit is calculated in rubles, dollars or any other currency. The above formula allows you to calculate the coefficient of gross profit – this indicator is convenient for comparing the profitability of various companies.

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Why is this data and indicators important. Investors always look at the gross margin to know how efficiently the company uses its resources. If the KVP of one company is 10%, and that of another company is 20%, this means that the second company receives twice as much money for every dollar (or unit of another currency) spent on production. If we assume that the other expenses of the companies are approximately equal, we can conclude that the second company is more promising for investment.

It is best to compare companies operating in the same economic sector. Some goods and services have a lower average rate of return than others.