There may not be much call for you to know how to calculate gross profit in your day-to-day life. However, this is useful information to know and will definitely come in handy if you own your business or want to find out how much profit you will make from your investing in stocks and shares. Read through the steps listed below to learn how to calculate gross profit.
Meaning. Gross profit margin is not a whole number as you would assume when you come across the term. It is actually an indicator of the profitability of a company or business on two fronts – (a) when compared to other business or companies in the same area or sector; and (b) when data is analyzed for one company only, but over different periods of time. The latter is especially helpful when you are trying to analyze the rise and growth of a company or a stock issue.
Collect data. Publicly traded companies are required to publish their financials each year to the Securities and Exchange Commission (SEC). So, the latest data is always available for your information. As the owner of your own business, you should be able to lay your hands on the required data, to calculate gross profit; else your accountant or CPA should be able to help you out with retrieving the relevant figures.
Facts or data required. In order to calculate gross profit, you will need the numbers for the following variables:
- Sales revenue for a given period – previous year or quarter, for example
- Cost of goods or services sold or traded during the same period
- Net sales for the period
Calculation. Subtract the cost of goods or services sold from the sales revenue during the same period. Divide the figure arrived at by the amount of net sales during the period. The amount arrived at will be the gross profit margin. Based on the purpose for your analysis, compare this figure with the gross profit margins of other comparable companies, or the same company’s performance over different years or quarters. This is a very good indicator of performance for a company or set of companies and whether the profitability is increasing or decreasing with time.
Calculating gross profit is very simple if you have the necessary information and know how to arrive at the final conclusion. In a great many instances, companies themselves publish the gross profit figures, so you may not even have to spend the time and effort to calculate!