Why measure overall profitability as a percentage?
assess profitability. If the business does not pay off, the company needs to reconsider the distribution of money and other resources, as well as take other measures. For example, expand the range or remove unprofitable positions;
find problems in business operations. For example, if a company has a low margin percentage, while its competitors have a fairly high one, then most likely the trading processes are disrupted or the production is not working well;
compare indicators. The profitability ratio should be analyzed. This helps to compare the sales efficiency of different products and obtain other useful information;
attract investors. A business with good margins attracts benin cell phone number list investors more actively than one with a low profitability rate.
Gross Margin Calculation Formula
Here is a standard formula for determining overall profitability:
Gross margin (in %) = (Revenue – Cost of goods sold)/Revenue.
The calculation results in an indicator that shows the company's earnings minus the costs of manufacturing or selling goods.
Let's give an example of how to calculate the gross margin ratio using the formula:
The revenue of the company "Dom" was 1 million rubles, and the cost of goods sold was 500 thousand rubles. The profitability ratio will be 50%. It can be calculated as follows: (1,000,000 - 500,000) / 1,000,000 = 500,000 / 1,000,000 = 0.5, or 50%.
Thus, from every ruble earned, the Dom company keeps exactly half for itself, since the same amount is spent on the production and sale of products.
Let's say "Dom" sells a household set for exactly 100 rubles, and spends 50 rubles on its production. To find out the marginality, you need to subtract the cost of goods sold from the revenue, and divide the final value by the revenue:
Overall profitability ratio = (100 rubles – 50 rubles)/100 rubles = 50 rubles/100 rubles = 0.5, or 50%.
That is, for every 1 ruble of revenue there is only 50 kopecks of profit, and the remaining 50 kopecks go to operating expenses.
If the margin is high, the business is working effectively. It is especially good when the profitability percentage is higher than the costs of manufacturing and selling the product. This means that the company sells its goods at a price higher than the cost of production.