How Do You Calculate The Gross Profit Ratio?
In investing, the gross profit ratio measures the difference between how much it costs to produce a product and how much the business is selling it for. In other words, the ratio shows how much of every dollar a company earns in sales is left over after paying for the goods that were sold. Here’s how to calculate it. Calculating the gross profit ratio is a simple equation:Gross profit divided by total revenue.You can find this information in a company’s annual report. For this example, we’ll use Microsoft’s 2007 annual report. To calculate gross profit, we’ll take Microsoft’s revenue ($51.1 billion) and subtract its cost of revenue, also known as cost of goods sold ($10.7 billion). This leaves us with a gross profit of $40.4 billion. So Microsoft’s 2007 gross profit ratio looks like this:$40.4 billion (gross profit) / $51.1 billion (total revenue)= 0.79. Move the decimal point two places to the right, and you get a gross profit ratio of 79 percent. This means that after Microsoft has p
