How to calculate the gross margin calculator

Gross profit margin

What is the gross profit margin?

Gross profit margin is the ratio that calculates the company's profitability after deducting the direct cost of goods sold from sales and is expressed as a percentage of sales. No other costs are taken into account other than the cost of the goods sold.

Gross profit margin formula

Here is the formula -

There are two components to the gross profit margin formula.

  • The first component is gross profit. To calculate gross profit, we need to start with gross sales. Gross sales are the first item in an income statement. We subtract the return on sales / sales discounts from the gross sales and get the net sales. The next item in the income statement is the cost of goods sold. If we subtract the cost of goods sold from net sales, we get the company's gross profit for the year.
  • The second component of the gross margin is sales. Revenue here means the total sales value of the goods sold. If we multiply the sales price for each number of goods sold, we get the total sales. Because "Sales Yields" or "Sales Discounts" cannot be included in the total sales value, we must subtract these items from the total sales value. And when we subtract this, we get “net sales”. And here we look at “net sales” as the second component of gross margin.

Examples

Honey Chocolate Ltd. has the following information in its income statement -

  • Net sales - $ 400,000
  • Cost of goods sold - $ 280,000

Find out the gross margin for the year.

First of all, we have to look at Honey Chocolate Ltd.'s gross profit. determine.

Here is the calculation.

  • Gross Profit = (Net Sales - Cost of Goods Sold) = ($ 400,000 - $ 280,000) = $ 120,000.

With the gross profit margin formula we get -

  • Gross margin = gross profit / sales * 100
  • Or gross margin = $ 120,000 / $ 400,000 * 100 = 30%.
  • From the gross margin calculation above, we can say that Honey Chocolate Ltd. 30% for the year.

To interpret this percentage, we need to look at other similar companies in the same industry.

Colgate gross margin

Let's calculate Colgate's gross margin. Colgate's gross margin = gross profit / net sales.

Operating costs include depreciation related to manufacturing processes (Colgate 10K 2015, p. 63).

Shipping and handling costs can be shown in the cost of sales or sales and administration costs. Colgate reported these as part of selling, general and administrative expenses. If such expenses were included in the cost of sales, Colgate's gross margin would have decreased 770 basis points from 58.6% to 50.9% and decreased 770 basis points and 750 basis points in 2014 and 2013, respectively.

Source: - Colgate 10K 2015, p. 46

Uses

Profitability is an important factor for investors. Investors mainly look at the net profit margin as well as the gross margin. The Gross Profit Margin Calculator is useful for investors as they can easily compare it to other similar companies by calculating the percentage.

By comparing the gross profit percentage of all similar companies in the same industry, investors get the knowledge whether the target company's gross profit is healthy or not. Gross profit percentage the better the overall health and profitability of the business. However, every investor should review all of the financial metrics before reaching any conclusion.

Gross profit margin calculator

You can use the following calculator.

Gross income
revenue
Gross Profit Margin Formula =
 
Gross Profit Margin Formula ==
Gross income
X.100
revenue

Calculate the gross profit margin in Excel

Now let's do the same example of a gross margin calculator.

That is very easy. You must provide the two inputs, gross profit and sales.

You can easily calculate the gross margin in the template provided.

You can download this template here - Gross Profit Margin Excel Template.

Gross Profit Margin Video