Gross profit margin

The gross profit margin measures a business's gross profit as a percentage of sales revenue. It tells you what share of every pound taken from sales the business keeps as gross profit, before other operating expenses and interest are paid.

The formula must be memorised:

Gross profit margin (%) = (gross profit ÷ sales revenue) × 100

The figure on top is gross profit, never net profit, and the figure underneath is always sales revenue. You may be given cost of sales rather than gross profit: work out gross profit first by subtracting cost of sales from sales revenue, then use it in the margin formula.

What a higher margin tells you

A higher gross profit margin means a larger proportion of sales revenue is kept as gross profit at that stage. That usually points to tighter control of direct costs such as materials and stock, or to a higher selling price relative to those costs.

A business with £150,000 of sales revenue and £60,000 of cost of sales makes £90,000 gross profit. Its margin is (£90,000 ÷ £150,000) × 100 = 60%. The business keeps 60p of every £1 of sales as gross profit.

Why percentages help comparisons

Money figures alone can mislead you, because a bigger business will usually show bigger profits simply because it sells more. Percentages put businesses of different sizes on a level footing.

Birchwood Bakery has the larger gross profit in money terms, but Hollin Farm Shop keeps a bigger share of its sales. The percentages make that difference clear, so gross profit margin is useful for comparing product lines within one business or for comparing rival firms in the same industry, where cost structures are similar.

Writing your answer

A gross profit margin is always an answer in percentage form, so multiply by 100 rather than leaving the decimal. If a question asks for a set number of decimal places, give exactly that many, rounding correctly.