Fully understanding a business’s gross profit ratio will help you figure out how effectively it manages its resources. Irrespective of the products or services a business offers, identifying the appropriate approach to use its labor and materials is likely to influence its long-term profitability. The gross profit ratio of a business is useful statistics, but it needs understanding of key figures related to the business’s sales and costs.
The GP ratio is a financial ratio which calculates a company’s profitability and productivity by dividing its gross profit by total net sales. By multiplying the figure by 100, the gp ratio can be represented in percentile form. Which is then referred to as the gross profit percentage or the gross profit margin.
The GP of any business is calculated by measuring total sales over a specific time period and subtracting the total costs of labor and resources used to manufacture the products and services that the business is offering.
Must Read – Significance of Gross Profit Ratio
Gross Profit Ratio Formula
Gross Profit Ratio = Gross profit / Net Sales
Gross Profit = Net Sales – COGS
COGS = Opening Stock + Purchases + Direct Expenses – Closing Stock
Net Sales = Cash Sales + Credit Sales – Sales Returns
Ideal Gross Profit Ratio
The gross profit margin varies depending on the market. A gross profit margin that is adequate in one sector could be despicably low in another. Businesses that produce goods utilizing labour and equipment, like supermarkets and wholesale dealers, often have higher gross profit margins than firms that purchase and distribute inventory, such as retailers and wholesale distributors.
This does not imply that producers are more successful. Gross profit margins are only one indicator of a company’s financial efficiency. Operating profits and return on capital are much more important financial indicators.
A healthy gross profit percentage helps you to meet your expenses while still providing a decent gain on your investment in the business.