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.