Gross Profit Percentage - Higher Business Management

What is Gross Profit Percentage Ratio?

It is a ratio used to measure how many pence of Gross Profit is earned out of every pound of sales.

FORMULA

Here is a reminder of the formula:

Gross Profit      x  100

Sales (Turnover)     1

HOW IT WORKS

Here is a worked out example of how to do the Gross Profit percentage. We shall say sales are £8 million and the Gross Profit was £6 million.

GP = £6 million   x 100

S   = £8 million        1

= 75%

This means that for every £1  of sales revenue, £0.75 remains after direct expenses are deducted. 

WHO USES IT?

Managers/directors/ shareholders to make comparisons year by year and also with similar companies in similar industries.

ANALYSIS AND INTERPRETATION

This percentage should be high in order to leave profit to cover remaining expenses.

An increase in this ration maybe down to a rise in sales or a fall in the cost of goods or even an increase in selling price.

Decrease in this ratio may be due to the flip arguments of the ones above (lowering the selling price or a rise in cost of goods) but in addition we have issues like cash stolen from the till or stock going off or pilfering.