(GP) Gross Profit Ratio: What is it and why does it matter?

The finance world has a large list of financial jargon that often leaves business owners in a state of confusion. So, what is (GP) Gross Profit Ratio, how is it calculated, and why does it matter?

What is Gross Profit (GP) Ratio?

(GP) Gross Profit Ratio is a profitability ratio that shows the relationship between gross profit and total net sales revenue. This, therefore, shows how much profit a company makes after deducting its cost of revenues. This tool is used to evaluate the operational performance of a business.

How do you calculate (GP) Gross Profit Ratio?

Gross Profit Ratio = (Gross Profit / Net Sales) X 100

Why does (GP) Gross Profit Ratio matter?

It is a great indicator of how profitable a product, service, or business is.

It can be useful to select between focusing on a profitable product or service and putting fewer resources to a less profitable product or service. It is also a great metric to compare your business to competitors. If their (GP) Gross Profit Ratio is higher than yours, they have found a way to provide that product or service more cheaply.

Other things to consider when looking at (GP) Gross Profit Ratio

Whilst (GP) Gross Profit Ratio is a great comparison tool, it does not tell the full story. Look a little further down the profit and loss and you will see a figure called Net Profit. This figure takes into account all of your admin costs as well as your Cost of Sales. Both are useful and tell different stories about the financial information you are looking at.

Read next:

• What is gross profit and how is it calculated?
• What is gross profit margin and how is it calculated?
• What is the gross profit margin formula and how is it calculated?
• What does gross profit percentage mean?
• What’s the difference between gross profit and net profit?

About the author

Edmund Cartwright ACCA MAAT, is the Audit Manager at Haines Watts and is based predominantly within the Berkhamsted and Aylesbury offices, serving clients across Hertfordshire and Buckinghamshire.

Edmund oversees the audit and other assurance engagements.

Edmund started his journey within audit in July 2012 and has worked across a variety of different types of audit since, including many blue chip companies, household brands, and large charities. Some of the more well-known clients include Apple, Fitbit, Airbnb, Fujifilm, Helen Douglas House and a number of the infamous Oxford Colleges.

You can contact Edmund via email at ECartwright@hwca.com or phone 01296 796 536