Gross Margin Ratio - PDF

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these are notes on gross profit margin ratio...

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Gross Margin Ratio The Gross Margin Ratio is a profitability ratio to show how well a company utilizes its assets to produce profit that compares the gross margin of a company to its revenue. It shows how much profit a company makes after paying off its Cost of Goods Sold. A company's gross profit margin percentage is calculated by first subtracting the cost of goods sold (COGS) from the net sales (gross revenues minus returns, allowances, and discounts). This figure is then divided by net sales, to calculate the gross profit margin in percentage terms. Since Gross margin ratio is a profitability ratio that measures how profitable a company can sell its inventory, higher ratios are more favorable. Higher ratios mean the company is selling their inventory at a higher profit percentage. High ratios can be achieved by buying inventory very cheaply. If retailers can get a big purchase discount when they buy their inventory from the manufacturer or wholesaler, their gross margin will be higher because their costs are down. Importance of the Gross Margin Ratio to a Small and Medium Enterprise. A Gross Margin is the difference between the Gross income earned by an enterprise and the direct costs (or cost of inputs) required for production. It is an important tool for you to know how to compile and understand the resulting values. For a cropping enterprise even the fuel costs are similar. The profitability ratios help in determining the earning capacity of your business. These ratios let you know the efficiency with which the resources of your business are utilized. The important ratios that are based on Gross Profit are Gross Profit Ratio and Gross Profit Margin. A company's Gross Profit demonstrates the efficiency of the business in making use of its labor, raw material and other supplies. A variety of reasons can impact the Gross Profit of your business. This change can be due to: Changes brought about in the products that lead to charging high prices Efficiency in managing the business that results in low cost sales Certain changes brought about in few of the accounting policies that lead to moving expenses from cost of sales to overheads or vice versa Purchasing raw materials at a low cost as a result of vertical integration of business...