In order to calculate gross profit ratio we require cost of good sold and the net sales of a company. In other words we require the revenue and the cost of goods sold figures of a company. Revenue of the company is also called its net sales. So the formula to calculate gross profit is as under
Net Sales= Gross Sales
Now gross profit will b calculated by deducting the cost of goods sold
Gross Profit = Gross Sales – Cost of goods sold
Again gross profit must not be messed up with the operating income. In order to calculate operating income we require net income that is the different between the gross profit and operating expenses including taxes and interest payments.
Net Income = Gross Profit – operating expense – taxes – interest payments
Operating Profit = Gross Profit – Total operating expenses
In order to understand gross profit in a better way lets have an example of gross profit calculation. Suppose a company XYZ has revenue or net sales amount equals to $30,000. Now assume that cost of goods sold is equal to the $20,000. Now to calculate gross profit we simply need to put the formula as mentioned above:-
Net Sales/ Revenue = $30,000
Cost of goods sole = $20,000
Gross Profit= 30,000 – 20,000
Gross Profit= $10,000
Now we can simple use gross profit to calculate gross profit ratio. In order to calculate gross profit ratio we will divide the gross profit by the total revenue or the net sales and will multiply the answer with hundred.
Gross Profit Ratio= Gross Profit/ Revenue x 100
Gross Profit Ratio=10,000/30,000x100
Gross Profit Ratio= 30 percent
All the figures required to calculate gross profit and gross profit ratio are generated from the income statement of the company’s financial profile.
Gross profit between the two companies can be calculated to measure the degree of efficiency of a company to produce same level and number of goods. For example company A and company B have sales of $ 1 million each. Assume that the cost of goods sold of company A is 90,000 dollars where as the cost of goods sold of company B is 80,000. The gross profit of company A is $100,000 where as the gross profit of company B is $200,000. This means company B uses same resources more efficiently to produce same number of products as compared to company A. in other words Company B spends less in producing the same amount of goods as produced by the company A.