14. Financial Statement Analysis

Ratios: Gross Profit Rate

# Ratios: Gross Profit Percentage

Brian Krogol

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Alright, so let's discuss another ratio here. The gross profit percentage. Let's check it out. So the gross profit percentage is gonna tell us how much gross profit we're getting for each dollar of sales. Okay? So it's gonna relate these two numbers and remember that gross profit. Let's write it over here gross profit. That's gonna be our sales revenue. And we'll say net sales because we might have had some things that decreased our sales. Net sales minus our cost of goods sold, right? That's always gonna be our gross profit calculation, Net sales minus cogs. Right? And we'll see that once we get to our formula here and the gross profit percentage, this is a very common ratio that's used to determine the profitability of the company. Okay, profitability. This is a profitability ratio. And it helps us to determine how much money they're making off of that very core core business of theirs. Alright, So one thing I want to note is sometimes they call gross profit the gross margin. Okay, gross profit, gross margin. Same thing. They're they're interchangeable terms. You might have heard the gross margin percentage, something like that. What we're talking about the same thing. All right, so let's go ahead and look at our formula here for the gross profit percentage. Notice in the in the numerator, what do we got? We've got our net sales minus cogs, right. Net sales minus cogs. And that is our gross profit. That's what we just calculated above and then in our denominator we have our net sales, right? So when you calculate this notice we use net sales in the numerator and the denominator sometimes they might just tell you, they might just say gross profit is this amount. Well then you've got your numerator already but sometimes they like to be tricky, they might tell you the net sales and the cogs and you have to calculate the gross profit yourself. Right? So that's about it here. One other thing with this ratio notice that we multiplied by 100. This one's a percentage, right? It's called the gross profit percentage. We usually show it as a percentage. Right? So Um that's that's a that's a key part of this and you don't want to mess up when you calculate it and then you have you know .01 and you leave it as .01%. But you actually have to move the decimal twice and it was 1% or something like that. Teacher might try and trick you. Alright, so we show it as a percentage. So make sure you're multiplying by 100 to get it into a percentage form. So how do we analyze this ratio? Remember when we deal with ratios, it's how much of the numerator do we have for each one of the denominator? So what we're saying here is how much gross profit we have, how much gross profit does the company get for each dollar of sales revenue. Right? So for each dollar that we bring in from selling something, how much of that is gross profit because some of that money that we brought in, well, we're gonna have to pay for our cogs, right? We have to pay for that inventory that we're selling what's left over after we pay for that. That's the gross profit. Cool. So how do we do comparisons with the gross profit percentage? Well, remember when we compare this this ratio, we usually want to compare to competitors, we want to use what's called benchmarking, right? We talked about this term in our introduction to ratios, benchmarking is where we compare our ratio. So whatever we got for our gross profit percentage, we wanna see how our competitors are doing, right? Maybe we're a t shirt business and we want to see if our when we sell t shirts and the cost of our t shirts are we doing as well as our competitors are on just that top core business of selling t shirts. Of course, once we get into our whole income statement, there's a bunch of other things going on that we could be doing inefficiently or efficiently, how we pay our rent, how much we pay in rent or selling expenses that we cause that we have to sell the t shirts, whatever it might be. But here we're just talking about, how much does it cost us to sell the t shirts and how much are we receiving when we sell each t shirt. Okay, so that's our gross profit percentage there. So when we want to compare, we want to look at industry averages competitors and see how we compare to those. Cool, Let's go ahead and pause here. And I want you guys, this is a pretty simple ratio. I want to just dive into some practice. I'm not gonna do an example for this one. You guys go ahead and try practice problem right away. Cool. Let's do it.

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