Gross Profit Margin Ratio Analysis - The Strategic CFO® (2024)

FAQs

How do you analyze gross profit margin ratio? ›

The gross profit margin is calculated by subtracting direct expenses or cost of goods sold (COGS) from net sales (gross revenues minus returns, allowances and discounts). That number is divided by net revenues, then multiplied by 100% to calculate the gross profit margin ratio.

The net profit margin ratio shows the percentage of sales revenue a company keeps after covering all of its costs including interest and taxes. It is one of five calculations used to measure profitability.

What is the gross profit margin formula? The gross profit margin formula, Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue x 100, shows the percentage ratio of revenue you keep for each sale after all costs are deducted.

The gross profit ratio (GP ratio) is a financial ratio that measures the profitability of a company by dividing its gross profit by net sales. The gross profit ratio is a percentage-based metric that shows how efficiently a company generates profit from its core business operations.

A gross profit margin of over 50% is healthy for most businesses. In some industries and business models, a gross margin of up to 90% can be achieved. Gross margins of less than 30% can be dangerous for businesses with high gross costs.

In most industries, 30% is a very high net profit margin. Companies with a profit margin of 20% generally show strong financial health. If this metric drops to around 5% or lower, most businesses will need to make changes to remain sustainable.

You may be asking yourself, “what is a good profit margin?” A good margin will vary considerably by industry, but as a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low.

Gross margin is expressed as a percentage. In order to calculate it, first subtract the cost of goods sold from the company's revenue. This figure is known as the company's gross profit (as a dollar figure). Then divide that figure by the total revenue and multiply it by 100 to get the gross margin.

Profit margin shows the profitability of what you sell.

Profitable businesses make more than they spend. That's why your profit margin is such an important metric to track. The higher the percentage—i.e. the leftover amount—the higher your profit margin, and the more profitable your business.

What is a good operating profit margin ratio? ›

Generally, a 10% operating profit margin is considered an average performance, and a 20% margin is excellent. It's also important to pay attention to the level of interest payments from a company's debt.

The gross profit ratio is a financial metric that helps a company assess its profitability. You can use it to determine the amount of profit a business makes by selling its goods and services after subtracting its direct costs.

Importance of understanding your gross margins

It is a window into the financial health of a company. It measures production and business efficiencies. It can help with setting the selling price of a product and competitive analysis. Gross margins can identify potential problems before they hurt the bottom line.

But in general, a healthy profit margin for a small business tends to range anywhere between 7% to 10%. Keep in mind, though, that certain businesses may see lower margins, such as retail or food-related companies. That's because they tend to have higher overhead costs.

What is the average profit margin for auto repair shops? According to Small Business Chron, auto repair shops generally have a profit margin of 50-65% for labor and 20-28% for parts sales.

Ford Motor's gross profit margin for fiscal years ending December 2019 to 2023 averaged 9.0%. Ford Motor's operated at median gross profit margin of 9.2% from fiscal years ending December 2019 to 2023. Looking back at the last 5 years, Ford Motor's gross profit margin peaked in December 2021 at 12.1%.

Toyota Motor Gross Profit Margin (Quarterly): 22.30% for Dec. 31, 2023.

Gross profit margin is a very important metric financial buyers and PE investors look at when evaluating a business. Based on our experience, a good benchmark gross profit margin for a SaaS company is over 75%. Typically, most privately held SaaS businesses we work with have GPM's in the range of 70% to 85%.