Gross Profit Margin

A company’s gross profit margin (gross margin) measures the company’s revenue after cost of goods sold. Simply it is how much they sold something for vs. how much it cost them to get it.

The formula looks like this

(Revenue) – (Cost of Goods Sold) / (Revenue)

If a company made 50 million in sales last year and the cost of goods sold was $25 million the gross margin would be .50 or 50%. This formula is used to compare a company with its competitors. Typically a gross profit margin over 50% is good.

By this rating Monopolies make great investments. They can raise the prices to whatever they want. Because they have no competition people have to pay the newer higher price. Software companies are a good example of this. Microsoft, for example has a gross margin of 81%.

On the other hand some very big companies will have low ratios. For example Wal-Mart which is a very successful company only has a gross profit margin of 23.7%.

This ratio does not tell the whole story. If we look at this ratio closer we realize it does not include all of the expenses a company has. In reality a company has to pay salaries, taxes, rent, ect. When we factor in those ratios we get a company’s net profit margin.

A net profit margin above 7% makes for a good investment a good buy.

Return From gross profit to Fumdamental Analysis