Gross margin ratio = Gross margin \/ Net revenue<\/p>
Where gross margin = Net sales – COGS<\/p><\/blockquote><\/figure>
The gross margin ratio is a profitability metric that determines how profitable a company’s inventory can be sold. Higher ratios are usually preferable in knowing how well a business is performing. Higher ratios indicate that the company is profiting more from its inventory or merchandise.<\/p>
There are two common ways to achieve high ratios. One option is to purchase inventory at a low cost. <\/p>
The second way for retailers to achieve a high ratio is to increase the price of their products. However, you must do it with a mindset that there are other competitors and customers will shop somewhere else if your goods or services are too expensive.<\/p>
A corporation having a high gross margin ratio will have high returns which will invariably be used to cover a whole lot like operating expenses eg, rent, utility, and salary.<\/p>
Example of Two Business Owners<\/h3> For example, Kevin’s business is a small business with net sales of $200,000 while Tom’s business has a net sales of $3,000,000. If Kevins COGS is $165,000 and Tom\u2019s COGS is $2, 700,000 <\/p>Gross margin = Net sales – COGS<\/p><\/blockquote><\/figure>
Kevin: $200,000 – $160,000 = $40,000<\/p>
Tom: $3,000,000 – $2, 700,000 = $300,000<\/p>
One would automatically conclude that Tom’s business is doing much better and more profitable than Kevin’s business. And that’s why GMR is important. <\/p>
Let’s do the maths <\/p>Gross margin ratio = Gross margin \/ Net revenue<\/p><\/blockquote><\/figure>
Kevin: $40,000 \/ $200,000 = 0.2 app 20%<\/p>
Tom : $300,000 \/ $3,000,000 = 0.1 app. 10%<\/p>
This is to say that Kevin’s business has better efficiency than Toms even though toms have a higher turnout on sales due to the number of customers he has. Kevin might not have as many customers as Tom but He sells higher than Kevin thereby profiting more than Kevin in GMR. <\/p>
This goes a long way to imply that Kevin’s business is a better business to invest in than Tom’s because of his high gross margin ratio. <\/p>
How to Calculate Gross Margin Percentage<\/span><\/h2>The following steps are to calculate the gross margin percentage:<\/p>
To begin with, take note of the company’s total revenues, which may be easily found as a line item on the income statement.<\/li><\/ul>Then, calculate the cost of goods sold either directly from the revenue statement or by adding the direct manufacturing costs, such as raw materials, labor wages, and so on.<\/li><\/ul>Subtracting the cost of products sold from total sales determines the gross profit. Total sales \u2013 COGS = gross profit<\/li><\/ul>Finally, as illustrated below, you calculate your gross margin percentage by dividing gross profit by total sales. As the name implies, it is expressed in percentages.<\/li><\/ul>Gross margin Profit Percentage Formula = Gross Margin \/ Total Sales x 100%<\/p><\/blockquote><\/figure>
Where the gross margin is (Total sales \u2013 Cost of goods sold)<\/p>
Example of GMP Calculation<\/span><\/h3>Consider ABC Inc. as an example of gross profit calculation. ABC Inc. is a company that makes customized wrist bracelets. ABC Inc. earned $150,000 in net revenue and other expenses at the end of the fiscal year. How will ABC Inc. GMP be computed based on the data?<\/p>
COGS = $80,000 <\/p>Gross Profit Percentage Formula = Gross Margin \/ Total Sales x 100%<\/p><\/blockquote><\/figure>
Gross margin = (Total sales \u2013 Cost of goods sold)<\/p>
GMP= $150,000 – $60,000 = $90,000<\/p>
= $90,000 \/ $150,000 X 100%<\/p>
GMP= 0.6 X 100%= 60%<\/p>
Conclusion<\/span><\/h2>Conclusively, tracking your gross margin profit could be beneficial to your business as your investors are likely to invest in your business thereby enhancing growth and development. So ensure that you’re constantly tracking them and checking your business performance. <\/p>
FAQs<\/h2>\n\t\t\t\tWhat is gross margin ratio?<\/h2>\t\t\t\t\n\t\t\t\t\t\t
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The gross margin ratio is a profitability metric that determines how profitable a company’s inventory can be sold.<\/p>\n\t\t\t<\/div>\n\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\n\t\t\t\tHow do we calculate gross margin percentage?<\/h2>\t\t\t\t\n\t\t\t\t\t\t
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To calculate gross margin Percentage = Gross Margin \/ Total Sales x 100%<\/p>\n\t\t\t<\/div>\n\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\n\t\t\t\tHow do i calculate my gross margin ratio?<\/h2>\t\t\t\t\n\t\t\t\t\t\t
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If you want to calculate your gross margin ratio use this formula: gross margin \/net revenue<\/p>\n\t\t\t<\/div>\n\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\n\t\t\t\tHow can i calculate my gross margin profit?<\/h2>\t\t\t\t\n\t\t\t\t\t\t
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To calculate your gross margin profit, use this formula: <\/p>\n\n
Calculate net sales<\/li> Calculate the cost of goods sold <\/li><\/ul>\n\nAfterward, use the following formula<\/p>\n\n
Gross margin = (Net sales – COGS) \/ Net sales <\/p>\n\t\t\t<\/div>\n\t\t<\/div>\n\t\t<\/section>\n\t\t\n