# Gross profit (GP) ratio

Gross profit ratio (GP ratio) is a profitability ratio that shows the relationship between gross profit and total net sales revenue. It is a popular tool to evaluate the operational performance of the business . The ratio is computed by dividing the gross profit figure by net sales.

## Formula:

The following formula/equation is used to compute gross profit ratio: When gross profit ratio is expressed in percentage form, it is known as gross profit margin or gross profit percentage. The formula of gross profit margin or percentage is given below: The basic components of the formula of gross profit ratio (GP ratio) are gross profit and net sales. Gross profit is equal to net sales minus cost of goods sold. Net sales are equal to total gross sales less returns inwards and discount allowed.  The information about gross profit and net sales is normally available from income statement of the company.

## Example:

The following data relates to a small trading company. Compute the gross profit ratio (GP ratio) of the company.

• Gross sales: \$1,000,000
• Sales returns: \$90,000
• Cost of goods sold: \$675,000

### Solution:

With the help of above information, we can compute the gross profit ratio as follows:

= (235,000* / 910,000**)

= 0.2582 or 25.82%

*Gross profit = Net sales – Cost of goods sold
= \$910,000 – \$675,000
= \$235,000

**Net sales = Gross sales – Sales returns
= \$1,000,000 – \$90,000
= \$910,000

The GP ratio is 25.82%. It means the company may reduce the selling price of its products by 25.82% without incurring any loss.

## Significance and interpretation:

Gross profit is very important for any business. It should be sufficient to cover all expenses and provide for profit.

There is no norm or standard to interpret gross profit ratio (GP ratio). Generally, a higher ratio is considered better.

The ratio can be used to test the business condition by comparing it with past years’ ratio and with the ratio of other companies in the industry. A consistent improvement  in gross profit ratio over the past years is the indication of continuous improvement . When the ratio is compared with that of others in the industry, the analyst must see whether they use the same accounting systems and practices.

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### 74 Comments on Gross profit (GP) ratio

1. samiry nasri

I really learn better in accounting ratios here because I can to find other terminologies related to ratio that I never knew before…thanks a lot

2. sree

how can i find out gross profit

closing stock value

sales value
no purchase

is it possible?

1. hsgfhsghdf

Kuch bhi

2. shinto

if you want to calculate gross profit with the figures of sales and closing stock value and no purchase ,use the following method:-
Closing stock value + sales value – openin g stock value

1. BHAVIKA

BUT NOT HAVE CLOSING STOCK VALUE

3. Accounting For Management

Can you provide your complete problem with figures?

1. Suraj bohara

Best site for learning accounting ratio

4. emmanuel debrah

i really enjoy the whole article.

5. Tim Aluri

This is better than my text book.. thanks!

6. Pooja

Sir should we need to consider opening stock in process and closing stock work in process while calculating cost of goods sold. If yes why sir? Please solve my doubt sir hope to get a favorable reply. Thanking you.

1. sachu

mmm

7. Accounting For Management

We consider opening and closing work in process (WIP) inventory for calculating cost of goods manufactured (COGM). WIP opening inventory is added to and subtracted from total manufacturing cost (direct materials + direct labor + manufacturing overhead) to arrive at cost of goods manufactured.

Example:

if

Manufacturing cost: 50,000
Work in process opening inventory: 2,000
Work in process closing inventory: 1,500
Finished goods opening inventory: 5,000
Finished goods closing inventory: 7,000

then

Cost of goods manufactured = 50,000 + 2,000 – 1500
= 50,500

and

Cost of goods sold = 50,500 + 5,000 – 7,000
=48,500

Sometime we calculate cost of goods manufactured as a part of cost of goods sold don’t confuse with that. For example we can calculate cost of goods sold in a single line as follows:

Cost of goods sold = 50,500 + 2,000 – 1500 + 5,000 – 7,000
=48,500

Please note that the cost of goods manufactured and sold must be calculated in their proper statement form.

8. Farhan

Dear Experts,

‘’If you as Sales Leader is carrying an annual cost of sales team which is known to you (In terms of the salary etc), then what should be the annual gross margin that you should deliver to the company to justify the cost ?’’

no other information has been given. can i get an answer

Thanks,
FA

9. Jene

How can i find gross profit ratio when the question is;

opening stock is 5,000 in excess of closing stock.
Cash sales is double of credit sales which is 70,000
purchases 150,000.

1. Suraj singh negi

firstly, cash sale = 2X of credit sale
then cash sale =140000
total sale =cash sale + credit sale
total sale =140000+70000
total sale =210000
after this you make the trading account and put the value of sale and purchases after this the trading account comes out a gross profit =60000
then put all the value in the ratio
G.P.R=G.P X 100
sales

10. Thanks 2 all

Whenever i saw that example fr0m i kn0w h0w 2 calculate that gross profit ratio

11. Dalmen sangma

N0w i knew how 2 calculate gross profit ratio. If sum1 didn’t kn0w about it den call me 9615325124

12. vishal

sir this qus solve
1 gross profit ratio = 25%
2 net profit/sales =20%
3 stock turnover ratio = 10
4 net profit/ capital =1/5
5 capital to total liabilities =1/2
6 fixed assets/capital = 5/4
7 fixed assets/total current assets = 5/7
8 fixed assets =2,00,000
9 closing stock =20,000
perpare a trading and p&l a/c and blance sheet

13. Ebson

its very clear how you stay in colom

14. shashank upreti

If opening inventory of the year is Rs 20,000. Goods purchased during the year is Rs. 100,000. Carriage Rs. 2,000, selling expenses Rs 2,000. Sales during the year is Rs 150,000, closing inventory is Rs. 25,000. Then gross profit will be ??????? Please give the solution.

15. Accounting For Management

I assume that the carriage in your question is carriage inward.

GP = 150,000 – 97,000*
=53,000

and

GP Ratio = (53,000/150,000)*100
=35.33

*[(20,000 + 100,000 + 2,000) – 25,000]

If the carriage is outward then exclude 2,000 from the calculation.

16. unicah shanina

Net accounts receivable at dec.31,2013 800,000
Net account receivable at dec. 31,2014 1200,000
Inventories,dec 31,2013 1,300,000
Inventories,dec 31,2014 1,200,000
Account receivable turn over 4 to 1
inventory turn over 3 to 1
Gross profit for 2014?

17. Chandima SL

It was really helpful and I really learn better in accounting ratios here because I can find other terminologies related to ratios that I never knew before…thanks a lot.

18. imran

Sale Rs. 3625574
Purchase Rs. 1999154
Direct exps. Rs.1206092
Op. Stock Rs. 249222
Plz Calculate The Closing Stock If Possible.
Thanks

1. Accounting For Management

Closing stock cannot be calculated as the cost of goods sold (COGS) is not known.

19. ali raza bhatti

if purchases are not given to find cost of good sold then how to find it.?

20. Natasha

The profit is equal to 20% of the selling price. Express the following as a formula and remember to define any variables.
How am I supposed to work this out if that’s the only given information available?

21. hasnaa

Give five possible reasons for a decline in gross profit as a percentage of sales revenue from one year to the next, briefly explaining for each why it has the effect of reducing the percentage.

22. Shayhena

Give five possible reasons for a decline in gross profit as a percentage of sales revenue from one year to the next, briefly explaining for each why it has the effect of reducing the percentage.

23. Fawzy

how to calculate cost of sales , net sales , cash, and the gross profit???
for an example=
cost of sales is rs. 90,000 , net sales rs.1,70,000 and cash rs.20,000. the gross profit will be ???
pls explain anybody…
Thank you

24. N.SHYAM SUNDAR

Very useful.Thanks

25. walker steed

Gross profit is 25% of cost of goods sold
Operating profit Rs. 50,000
Selling and administration expense are 15% of sales
Financial expenses are 1% of sales
Opening stock Rs. 500,000
Purchases Rs. 700,000

how to calculate sale if we have these figures

26. zaheer

purchase price is RS. 8000 and sale price is Rs. 19800, what is the profit percentage, please tell me the answer in %

Thanking you

27. Accounting For Management

@Zaheer

Profit = 19,800 – 8,000
=11,800
Percentage = (11,800/19,800)*100
=59.6%

28. Kudakwashe

How do we calculate turnover and gross profit given average stock at hand, gross profit as a percentage of turnover and rate of stock turn

29. Accounts_

How to determine sales,when the financial data is given :
Current Ratio 2.7
Quick Ratio 1.8
Current Liabilities Rs.6,00,000
Inventory Turnover 4times

30. Accounting For Management

Current ratio = Current assets/Current liabilities
2.7 = Current assets/600,000
Current assets = 2.7*600,000
=1,620,000

Quick ratio = Quick assets/Current liabilities
1.8 = Quick assets/600,000
Current assets = 1.8*600,000
=1,080,000

Inventory = Current assets – Quick assets
=1,620,000 – 1,080,000
=540,000

Inventory turnover ratio = Sales/Inventory
4 = Sales/540,000
Sales = 2,160,000

31. Fajar Butt

If sales Rs 25000, purchases Rs 25000, closing stock Rs 10000, gross loss on cost 20%, then opening stock=?

P.S: how to find out gross loss/profit on cost?

32. Accounts_

Thank u so much for this solution,I just started learning Financing subject,So ur help is really grateful.I hope I can ask more questions when required.Thank you once again.Regards

33. srinivas

Gross profit on sales 25% , cost of goods sold rupees 400000. Find out sales?

1. ali

solution?

34. JaSiM

If the sales Rs.25000;purchases Rs.25000;closing stock Rs;10000; gross loss on cost 20%, then what is the stock in the begining

35. vaibhav

Sales = COGS + G.P
i.e.= 25000=Cogs + (-6250)
So Cogs = 25000+6250 = 31250
Also cogs = opening stock + net purchases + direct expense – closing stock
So 31250 = opening stock + 25000 + 0 – 10000
31250 = opening stock + 15000
So opening stock = 31250 – 15000
16250
=

1. minsei

How do u get 6250 or from where

2. hendrina

I think this one need a collection sales = COGS+G.P i.e.=20/100*25000=cogs + 6250 is incorrect

36. vinay

can it be more than 100%?

37. srinivas

Dear Sir,

Present i am working in Yamaha show room as accountant.

Sir, i need to prepare Purchase and sales and closing value of the stock,Gross profit the each vehicle and prepare the balance sheet..plz me sir.

38. P.lakshmi

sale 1,39,47,252.00
purchase 98,85,258.20
Opening Stock 12,53,649.00
Direct expenses 18,76,193.00

How to calculation Gross profit and closing stock percentage

39. sasha

if the gross is 52% is it the company doing well or not? and how can that be? in the question theres only provide for 1yr(2015). fyi, this question is not comparing with other year.

40. Shah Zaem

How we will find only
Gross Profit Percentage :
Net Profit Percentage

41. ken

Great! I must say this is very helpful when considering formulas.

42. pinky

How to calculate COGS if opening stock , purchases and closing stock is not available?

43. Nicholas

thanks but help me solve this.
Grace business has a rate of turn over of 6 times,the average stock is 150000,trade discout (margin allowed)25% of selling price ,expencess are 60% of profit.calculate
a)cost of goods sold
b)Gross profit margin
c)turn over
d)total expencess
e)net profit

44. Zakir

if, sales=800,000
Markup rate=25% of cost
What would will be The Gross Profit.??

1. Markup rate = Markup amt ÷ selling price
where,
Markup amt = Selling – cost ==> Gross profit

Cost of goods sold or Cost :
= Net sales ÷ (1 + markup rate)
= 800,000 ÷ (1 + 0.25)
= 800,000 ÷ 1.25 ==> 640,000
Gross profit = Sales – cost of goods sold
= 800,000 – 640,000 ==> 160,000

640,000 × 0.25 ==> 160,000

45. Teshale

if the costs of good sold is 100,000 and operating expenses 50,000
a/what is the gross profit?
b/what is the net profit?

46. Vineetha

Sir,
Nice explanation
But when the question is given as x and y and totalling up this how can we solve a problem….pls reply soon

47. Ben Jr

nice explanation,but
sir;

48. Cost of goods sold = \$600,000
Gross profit Ratio = 25%

Find out :
(a) Sales
(b) Gross profit

1. Plz solve this question

49. Prachi Singh

What will be the treatment of cost of net sales in the presence of sales and sales return while calculating GPR

50. Nabbu bista

if selling price is fixed 25% above the cost the gross profit ratio is…….

51. Chandrashekhara

Gross profit ratio of a firm is 25% gross profit is 60000 calculate the sales

1. Accounting For Management

Gross profit = \$60,000
Gross profit ratio = 25%
Sales = 60,000/0.25 = \$240,000
Cost of goods sold = \$240,000 – \$60,000 = \$180,000

52. Pratiksha

Gross profit during the year Rs.100000
Gross profit Ratio = 25%
Sales = ?

53. I HAVE THE FORMULA OF NET NPA & GROSS NPA

54. anoop

can any one tell me if cost of goods sold is no given

55. hendrina

what is deducted from sales to find gross profit

1. Accounting For Management

Cost of goods sold (COGS)

56. I.M.MUZIB

This is really effective discussion. In somewhere Gross Profit ratio is expressed by %. Is it correct?
Here, mentioned GP margin or percentage can only be expressed as %.
Thanks.

57. Harish talwar

calculate the Gross profit ratio and Net profit ratio
Sales=115000
Cost of goods sold=85000
Net profit=75000
Sales returns=75000.
?

58. Tank neha

Suggetion for high gross profit ratio

59. MISTY

Sir/madam could u plz find out these problem
Sales-25,20,000
Net profit-3,60,000
Fixed assets-14,40,000
Current liabilities-6,00,000
Cost of goods sold-19,20,000
Current assets-7,60,000
Inventory-8,00,000
Calculate:-
a.gross profi ratio
b.return on total assets ratio
c.inventory turnover ratio
d.working capital

60. Anand

Hi, in my scenario, the business is a physiotherapy service. I don’t sell anything other than our service. So for us, do we need to consider GP ratio as a messure for monitoring my business. If so, COGS includes the salary of physios? Could you explain how this ratio is applicable for service businesses.