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Gross Profit Margin Ratio

April 13, 2006

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Your gross profit margin can be calculated with the following formula, using figures taken from your income statement:

Recall that gross profit is the amount of sales dollars remaining after the cost of goods sold has been deducted.

If your gross profit margin is declining over time, it may mean that your inventory management needs to be improved, or that your selling prices are not rising as fast as the costs of the goods you sell. If you are a manufacturer, it may mean that your costs of production are rising faster than your prices, and adjustments on either side (or both) are necessary.

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