Apple’s net sales for the quarter ending June 27, 2020, were $59.7 billion, and its cost of sales was $37 billion for the period. Apple’s gross profit margin for the quarter was 38%, ($59.7 billion – $37 billion) / $59.7 billion. Profit margin is the percentage of profit that a company retains after deducting costs from sales revenue. Expressing profit in terms of a percentage of revenue, rather than just stating a dollar amount, is more helpful for evaluating a company’s financial condition. Shifting consumer tastes and preferences can force companies to adjust their product offerings. This might entail R&D costs, rebranding expenses, or promotional costs to introduce new products, all of which can strain gross margins, at least temporarily.

Gross Profit for New Companies

• A good gross margin ratio is often considered to be anywhere between 50% to 70%.
• The gross margin is extremely simple, straightforward to calculate, and provides an instant snapshot of how much revenue is retained after production costs are deducted.
• Gross profit margins vary significantly across industries, so you can assess a good gross margin by looking at the normal range for small companies in your industry.
• Both of these figures can be found on corporate financial statements and specifically on a company’s income statement.
• Many businesses regularly eliminate low-performing inventory or change their service offerings.
• This figure can help companies understand whether there are any inefficiencies and if cuts are required to address them and increase profits.

Others, like the tech industry, that have minimal costs of goods typically produce high gross margins. To calculate a company’s net profit margin, subtract the COGS, operating gross margin accounting expenses, other expenses, interest, and taxes from its revenue. Then, divide this figure by the total revenue for the period and multiply by 100 to get the percentage.

Example of Net Profit Margin

Companies use gross profit margin to identify areas for cost-cutting and sales improvement. A high gross profit margin indicates efficient operations, while a low margin suggests areas needing improvement. It looks at a company’s gross profit compared to its revenue or sales and is expressed as a percentage.

Gross Margin Ratio Definition and Formula

Gross margin alone specifies how much profit a firm makes after deducting the costs from the revenue generated. Knowing your gross margin rate or ratio is extremely helpful for businesses large and small. For example, Joe’s Auto Shop recognized revenues in the amount of $120,000 in the month of January, while his cost of goods sold was $61,000. Remember, we’re not including any general expenses in this calculation, only expenses directly related to producing the goods and services. The gross margin is the revenue remaining upon subtracting cost of goods sold (COGS), expressed as a percentage. The concept of GP is particularly important to cost accountants and management because it allows them to create budgets and forecast future activities.

The businesses with the highest profit margins are typically service industries like law, banking, and software development. They have low operating costs because they don’t have inventory, which means they subtract less in cost of goods sold and retain more of their revenue. Despite the widespread usage of gross profit margin ratios, many consider their drawbacks.

Reconsider Your Pricing Strategy

Gross margin is something that all investors should consider when evaluating a company before buying any stock. You can either calculate gross profit yourself using the companies’ income statements or look up the companies on a financial data website, which is probably the quickest. This shows the company is improving its profitability and efficiency, retaining more money per each dollar of revenue generated.