What is the gross profit margin? How to calculate to achieve business efficiency

Learn in detail about gross profit ratio and calculation formula to help businesses optimize profits. See the article now with Viindoo.

Gross profit margin is a financial index commonly used in many businesses around the world. This is the main and important index that businesses need to consider to maintain profitability in operations. And in the following article, Viindoo will share all information related to the concept, meaning, calculation and ways to manage gross profit margin effectively.

Concept and meaning of gross profit margin

Gross profit margin is a financial index that represents the percentage of profit a business earns from its main business activities, after deducting direct costs related to production and sales. Gross profit margin is an important financial indicator used to measure a business's business performance.

Gross profit margin

Meaning of gross profit margin:

• There are many levels of profitability that analysts monitor to evaluate the performance of a business. These levels include gross profit, operating profit, and net income. Each level provides a different view of a business's profitability.
• Gross profit is the first level of profitability, providing analysts with a view of a company's ability to produce or provide services relative to its competitors.
• Gross profit margin is calculated by dividing gross profit by revenue. This allows analysts to compare different business models with a quantitative index.
• This index shows how much income each dollar of revenue generates. Gross profit margin is a useful indicator when comparing businesses in the same industry.

Formula to calculate gross profit margin

Gross profit ratio is calculated according to the formula:

Gross profit margin (%) = Gross profit / Revenue

In there:

Gross profit = Revenue - Cost of goods sold (COGS)

And in some cases, revenue can be replaced by net revenue. And gross profit margin will be calculated using the formula:

Gross profit margin (%) = Gross profit / Net revenue

Formula to calculate gross profit margin

Ways to improve gross profit margin

Cut production costs:

As a business expands, it can place large orders, establish more favorable payment terms with suppliers, or increase production. These measures help reduce production costs.

Using lower cost raw materials is also a way to reduce the cost of goods sold, thereby increasing its gross profit margin. However, this needs to be done carefully to avoid reducing product quality, causing loss of customers and reduced revenue.

Cut production costs

Expand the scale of production:

To save production costs while still maintaining quality, many businesses choose to expand production scale. This is an effective long-term strategy, helping to reduce average costs for raw materials, machinery, labor and other assets. Expanding scale helps save costs and improve the production capacity of the enterprise.

Expand the scale of production

During difficult economic times such as inflation, businesses may have to increase selling prices to maintain profits. When raising prices, businesses need to monitor their competitors' prices to avoid losing customers to cheaper options. Increasing prices gradually or giving customers advance notice can help users feel respected. At the same time, customers can also accept the new price more easily.

Other profit rate calculation formulas that businesses need to pay attention to

ROS net profit margin

Net profit margin (ROS) represents the ratio of profit after tax to revenue. This index is also known as the return on revenue ratio. The ROS index is used to evaluate a business's business performance by determining the percentage of revenue converted into operating profit.

Net profit margin

To calculate the ROS index, we take net profit (profit after tax) and divide it by net revenue. The specific formula is as follows:

ROS = (Profit after tax / Net revenue) x 100%

In there:

• Net revenue: Actual sales revenue after deducting sales deductions.
• Profit after tax: Is profit before tax minus total tax payable and plus deferred taxes.

Return on assets ROA

ROA is an index that measures how effectively a business is using assets to generate profits. This index represents the amount of profit a business can earn from each dollar of invested assets.

ROA is calculated by dividing profit after tax by total assets. The specific formula is as follows:

ROA = Profit after tax / Total assets

Rate of return on assets

Return on equity ROE

Return on equity (ROE) is a financial indicator that measures a business's ability to generate profits from the capital that shareholders have invested. ROE provides a view of the efficiency of the use of equity capital and allows the success of a business to be compared with its competitors in the same industry.

The following is the formula to calculate ROE ratio:

ROE = Profit after tax / Total equity

Return on equity

Manage profit margins effectively with Viindoo Project

If your business is seeing problems in its business operations and needs to improve its effective profit margin for each project, Viindoo Project is the right choice. This is software that helps businesses plan work and projects effectively. Along with that, Viindoo Project also supports accurate and timely tracking of project progress on a single system, thereby optimizing profit margins for each project.

Viindoo Project

The software provides tools to plan and track work by priority. This helps businesses easily control the progress and performance of each employee. Not only that, Viindoo Project provides businesses with powerful tools to monitor and optimize financial performance.