Gross profit is a financial metric that represents the revenue a company earns from its core operations minus the direct costs associated with producing or providing the goods or services sold. It provides a measure of the profitability of a company’s primary business activities before accounting for indirect expenses such as operating costs, interest, and taxes.
Gross profit is calculated using the following formula:
Gross profit = revenue – cost of goods sold (COGS)
The gross profit can also be expressed as a percentage, known as gross profit margin. It is calculated using the formula:
Gross profit margin = (gross profit / revenue) x 100%
This provides a standardised measure of profitability, making it easier to compare companies of different sizes and industries.
A higher gross profit indicates that a company is retaining a larger portion of its revenue after accounting for direct production costs. This suggests strong operational efficiency in producing or providing goods and services. On the other hand, a lower gross profit may indicate higher production costs relative to revenue, which can potentially impact overall profitability.
Gross profit does not take into account all expenses, and thus, it provides an incomplete view of a company’s overall profitability.