How To Calculate Gross Margin

Hi, my name is Grant Hobson. I have been a finance analyst for the last six years. Today I'm going to run you through some financial performance methods, as well as some investment appraisal techniques.

How to calculate gross profit margin: prior to calculating gross profit margin, you should find it beneficial to learn how to calculate gross profit. Gross profit margin is a financial metric that is used to assess a firm's financial health by revealing a proportion of the money left over, after accounting for the revenue and the cost of goods sold. Calculation for the gross profit margin is simply your revenue, minus your COGS, divided by the revenue.

The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by the company. The higher the gross margin percentage, the more the company retains on each pound of sales to services of its costs and obligations. So an example of this is as below.

So if we have generated a revenue of £2,000, the cost of sales was £1,500, and the revenue was £2,000, and the gross profit margin that we have generated on this product is 25%. So we have made a gross profit of £500, and this is a 25% margin.