## What is the Gross Profit Percentage?

Gross Profit Percentage is a measure of profitability that calculates how much of every dollar of revenue is left over after paying off the cost of goods sold (COGS). In other words, it measures the efficiency of a company in utilizing its input costs of production, such as raw materials and labour, in order to produce and sell its products profitably.

It can be seen as the percentage of sales that exceeds the direct costs associated with manufacturing the product. These direct costs or COGS primarily consist of raw materials and direct labor. Calculation of gross profit percentage formula is done by dividing the gross profit by the total sales and expressed in percentage terms.

### Gross Profit Margin Formula

Gross profit percentage formula is represented as,

**Gross profit percentage formula = Gross profit / Total sales * 100%**

The gross profit percentage formula can be further expanded as,

**Gross profit percentage formula = (Total sales – Cost of goods sold) / Total sales * 100%**

The money that is remaining after covering the COGS is used to service other operating expenses like selling/commission expense, general & administrative expenses, research & development, marketing expense and interest expense that appear further below in the income statement. As such, the higher it is, the better it is for a company to pay off the operating expenses of the business.

### Steps to Determine Gross Profit Percentage

The calculation of gross profit percentage formula can be simply done by using the following steps:

**Step 1:** Firstly, note the total sales of the company which is easily available as a line item in the income statement.

**Step 2:** Next, either gather the COGS directly from the income statement or compute the COGS by adding the direct costs of manufacturing such as raw materials, labor wages etc.

**Step 3:** Next, the gross profit is calculated by deducting the COGS from the total sales.

**Gross profit = Total sales – COGS**

**Step 4:** Finally, it is calculated by dividing the gross profit by the total sales as shown below. It is expressed in percentage as the name suggests.

**Gross profit percentage formula = (Total sales – Cost of goods sold) / Total sales * 100%**

### Gross Profit Percentage Examples

Let’s understand the concept with the help of a simple example to understand it better.

#### Example #1

**Let us consider an example of a company called XYZ Limited for doing the calculation of gross profit percentage. XYZ Limited is in the business of manufacturing customized roller skates for both professional and amateur skaters. At the end of the financial year, XYZ Limited has earned $150,000 in total net sales along with the following expenses.**

As per the question, Based on the below information we will do the calculation of gross profit percentage for XYZ Limited.

By using the above data, we will first calculate the Cost of Goods Sold(COGS)

- COGS = Labour wages + Raw materials expense + Factory rent
- = $50,000 + $25,000 + $5,000

COGS= **$80,000**

[Only those costs are taken in the computation of COGS which can be directly allocated to the production]

Now, we will calculate the Gross Profit by using data given,

- Gross profit = Total sales – COGS
- = $150,000 – $80,000

Gross profit = **$70,000**

Therefore, the calculation of gross profit percentage for XYZ Limited will be

- Gross profit percentage formula = Gross profit / Total sales * 100%
- = $70,000 / $150,000 * 100%

XYZ Limited’s GPP for the year is as follows

XYZ Limited’s gross profit percentage for the year stood at **46.67%.**

#### Example 2

L**et us take the example of Apple Inc. For the gross profit percentage calculation for the fiscal year 2016, 2017 and 2018.**

As per the annual reports, the following information is available:

Based on the below information, we will do the calculation of Apple Inc. for the year 2016, 2017 and 2018.

By using the above data, we will first calculate the gross profit of Apple Inc. for the year 2016,

- Gross profit for 2016 = Net sales (2016) – Cost of sales (2016)
- = $215,639 – $131,376

- Gross profit for 2016 =
**$84,263** - Gross profit for 2017 = $229,234 – $141,048

- Gross profit for 2017=
**$88,186** - Gross profit for 2018 = $265,595 – $163,756

Gross profit for 2018= **$101,839**

Now we will, do the calculation of gross profit percentage of Apple Inc. for the year 2016

- GPP for 2016 = Gross profit (2016) / Net sales (2016) * 100%
- = $84,263 / $215,639 * 100%

GPP for 2016= **39.08%**

Therefore, the calculation of the gross profit percentage of Apple Inc. for the year 2017 will be

- GPP for 2017 = $88,186 / $229,234 * 100%

GPP for 2017= **38.47%**

Therefore, calculation of Gross profit percentage of Apple Inc. for the year 2018 will be

- GPP for 2018 = $101,839 / $265,595 * 100%

GPP for 2018 = **38.34%**

Therefore, the calculation of the gross profit percentage of Apple Inc. for 2016, 2017 and 2018 stood at 39.08%, 38.47% and 38.34% respectively.

### Relevance and Uses of Gross Profit Percentage

- The understanding of it is very important for an investor because it shows how profitable is the core business activities of the company without taking into consideration the indirect costs. An analyst can use this ratio, especially as an assessment metric to compare the operating performance of a company with other players within the same industry and sector. Also, companies use this ratio as an indication of the financial benefit and viability of a particular product or service.
- Any money that is left after covering the COGS is used to pay off other operating expenses. In simple words, the higher it is the more the company saves on each dollar of sales to service its other operating costs and business obligations.
- If a company is capable of sustaining materially higher gross profit margins compared to most of its peers always, then it means that it has more efficient processes and more efficient operations that makes it a safe long term investment.
- On the other hand, if a company is not able to earn an adequate gross profit percentage, then it may be difficult for such a company to pay for its operating expenses. As such, the gross profit percentage of a company should be stable unless and until there are some major changes done to the company’s business model.

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