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Understanding Gross Profit Margins.
Gross Profit Margins.
The gross profit margin ( sometimes referred to as gross profit ) indicates the percentage of each sales dollar remaining after a firm has paid for its goods. The basic formula is calculated as follows:
GPM = ( Sales - Cost of Goods Sold )/ Sales
The higher the GPM the better pricing flexibility and cost management controls a firm has in its operations. USBR calculates GPM using the prior four quarters of financial performance.
Gross margin is particularily important in retailing and one of the most important financial measures because its an indicator of profitability for a retailer. Gross margin can vary from quarter to quarter or year to year depending on economic conditions such as consumer spending, unemployment, and even interest rates.
Gross margins can rise due to a more higher margin merchandise mix throughout a store, serving higher income customers, or even a retailer merchandising more of its own private label offerings throughout a store.. However, gross margins can fall due to an inflationary economy, high inventory levels which forces a retailer to markdown merchandise, competitive intensity, or significant changes in a retailers merchandise or customer mix.