Gross Profit Ratio

Gross Profit Ratio is a type of Profitability Ratio that determines the mathematical relation between Gross Profit and Revenue from Operation. It indicates the Gross Margin on Products sold.
$$Gross\quad Profit\quad Ratio=\frac { Gross\quad Profit }{ Net\quad Sales}$$
Where,

• Gross Profit = Revenue from Sales – Cost of Goods Sold (COGS)
• And Net Sales is the Total Revenue from Sales.
• Gross Profit Ratio multiplied by 100 provides the Gross Profit Margin in percentage Terms.

Significance and Interpretation

• It is very important for an industry to maintain a stable Gross Profit Ratio, frequent variations in the ratio points towards its instability.
• High Gross Profit Ratio is expected by every company to indicate high profits. Factors that affect the Gross Profit Ratio are as following:
• High Price: The high price of a product will directly influence the profit associated, keeping the manufacturing costs at the same level. Higher Price of a product may be due to several reasons as below:
• Superior Products (6GB RAM vs 2GB RAM)
• Brand Value (e.g. Samsung vs Vivo)
• Use of Technology (Magnetic Hard Disk vs Solid State Drives)
• Low Product Cost: Cost of Goods Sold (COGS) directly affects the Gross Profit of the company, a low COGS indicates Higher Gross Profit Ratio.

Examples

Example 1: Given below are few details of M/S XYZ Ltd., use them an calculate the Gross profit ratio for M/S XYZ Ltd.

Particulars	Amount (in Rs.)
Revenue from Sales (Cash)	100000.00
Revenue from Sales (Credit)	55000.00
Cost of Labour	40000.00
Material Cost	45000.00

Solution:

Net Sales Revenue = Cash Revenue from Sales + Credit Revenue from Sales

⇨ Rs. 155000.00
Cost of Goods Sold = Cost of Labour + Material Cost 

⇨ Rs. 85000.00
Gross Profit = Net Sales Revenue – Cost of Goods Sold 

⇨ 155000 – 85000 

⇨ Rs. 70000.00
Gross Profit Ratio = Gross Profit / Net Sales Revenue 

⇨ 70000 / 155000 

⇨ 14 / 31
Hence, Gross profit Ratio = 14/31 or 0.4516 or 45.16%