Gross Profit & Gross Profit Margin

Gross Profit is total revenue minus cost of goods sold. It is basically the profits of the company before operating income and net income.

Gross Profit Margin, expressed as a percentage, is calculated as:

Gross Profit Margin = Gross profit / Revenue * 100

Gross profit margin or gross margin ascertains the core profitability of a company before overhead costs and also the financial success of a product or service. Gross profit margin allows one to compare similar companies to each other and to the industry as a whole to determine relative profitability.

Companies with higher gross profit margins will always be preferred by the investors and will have a competitive edge over peers. Simply put, they enjoy advantage of charging a higher price for their goods/services or paying less for their direct costs of material and inputs.

Let us understand this concept with a real life example. Below are the extracts of the Profit & Loss Statements of Apollo Tyres and Ceat for FY 2018:

In the above case, CEAT (having a gross profit margin of 38.26%) seems to have a strategic dominance over Apollo Tyres (having a gross profit margin of 35.41%) in pricing its products or incurring less direct costs, which is reflected in the gross profit margin of the two companies.