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Financial Terms and Glossary

Gross profit margin

Gross Profit Margin

Gross profit margin is a financial ratio that measures the percentage of revenue that exceeds the cost of goods sold (COGS). It shows how much of each dollar of revenue is left after covering direct costs and reflects a company’s efficiency in producing and selling its products. A higher gross profit margin indicates better operational efficiency and pricing power, allowing a company to retain more revenue as profit.

Example

If a company’s sales are $500,000 and its COGS is $300,000, the gross profit is $200,000, resulting in a gross profit margin of 40%, showing that 40% of sales revenue exceeds direct costs.

Key points

• Measures the percentage of revenue remaining after covering COGS.

• Indicates the efficiency of production and sales operations.

• A higher margin suggests better profitability and cost management.

Quick Answers to Curious Questions

Why is gross profit margin important for business analysis?

It helps assess how effectively a company manages production costs relative to sales, influencing overall profitability and competitive positioning.

How can companies improve their gross profit margin?

Improvements can be made by reducing production costs, optimizing pricing strategies, and enhancing product quality or value.

What does a declining gross profit margin indicate?

A declining margin may indicate rising production costs, pricing pressure, or inefficiencies in the company’s operations, affecting profitability.

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