Gross profit (GP) ratio

By: Rashid Javed | Updated on: October 26th, 2021

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:

gross-profit-ratio-img1

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:

gross-profit-ratio-img2

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.

A D V E R T I S E M E N T

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.

More from Financial statement analysis (explanations):
A D V E R T I S E M E N T
77 Comments on Gross profit (GP) ratio
  1. 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

    1. 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. What could have been the reason for the increased depreciation
      expense?
      5. What could have been the reason for the increased interest
      expense?

  2. 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.

  3. 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.

  4. Dear Experts,

    I have been asked following question by some one, can you kindly advice with correct answer

    ‘’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

  5. 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.

    Please answer as soon as possible.

    1. 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
      your answer comes 28.57 👍

  6. 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

  7. 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.

  8. 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.

  9. 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?

  10. 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.

  11. Sale Rs. 3625574
    Purchase Rs. 1999154
    Direct exps. Rs.1206092
    Op. Stock Rs. 249222
    Plz Calculate The Closing Stock If Possible.
    Answer if be sure.
    Thanks

  12. 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?

  13. 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.

  14. @hasnaa, i need also this answer. Could anyone answer this:
    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.

  15. 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

  16. 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

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

    Thanking you

  18. 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

  19. 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
    Please let me know the answer ,Thank you

  20. 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

  21. Please help me with this problem:

    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?

  22. 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

  23. JaSim the answers to your question is as follows

    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
    =

  24. 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.

  25. 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

  26. 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.

  27. How to calculate COGS if opening stock , purchases and closing stock is not available?
    Is total income and gross profit same? Please reply me.

  28. 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

    1. MUHAMMAD ALI RAZA SAGAR

      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

  29. 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

    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

  30. 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.

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

  32. 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

  33. 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.

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