Gross
Profit Margin: Gross profit margin is a financial term used to
get the percentage of revenue left over to cover overheads, finance cost, taxes
and future savings.
Formula: Revenue
– Cost of goods sold
Revenue
Implication:
Many
companies show huge revenues but still incur loses. This is with the obvious reason
that the left over revenue after deducting cost of goods sold is not enough to
pay off their operating and other expanses. This metric is again useful within
the same industry. Cross industry company comparison may not be meaningful.
Example: Company
A and Company B(of the same industry) both have $10 million in sales. Company
A's cost of goods sold (COGS) is $8 million and Company B's COGS is $11 million.
Company A's gross profit margin will be 20% and Company B incur losses worth $1
million. Company A spends less money to make the same amount of sales, and is
therefore more efficient
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