Ratio showing gross profit as a share of revenue after cost of goods sold has been deducted.
Gross profit margin is the ratio that shows gross profit as a share of revenue after cost of goods sold has been deducted. It helps readers judge how much room is left from sales before operating expenses and other non-product costs are considered.
Changes in gross profit margin can signal pricing pressure, cost inflation, inventory problems, product-mix shifts, or weak cost control. It is one of the fastest ways to read operating quality from the income statement.
The basic formula is:
Gross profit margin = gross profit / revenue.
Because gross profit is revenue minus cost of goods sold, the ratio depends heavily on accurate revenue recognition, inventory accounting, and cost classification.
If revenue is 500,000 and cost of goods sold is 320,000, gross profit is 180,000. Gross profit margin is 36 percent.
Gross profit margin is not the same as contribution margin or net profit margin. Each measure answers a different question and uses a different cost base.