Gross Profit Percentage
To evaluate the financial performance of the company gross profit percentage is used. This ratio determines the earnings of a company .Preference is given to a high percentage of gross profit .This is so because enough financial resources are provided to the company so that it can pay for development of the product,research and any other costs which is used for the enhancement of a business. A company with low percentage of gross profit has fewer resources.
This ratio can be calculated as direct cost of the sales upon total sales. Also it can be calculated by adding the overhead costs, direct labor and material and then finally subtracting it from the revenue. But the problem with this calculation is variable production costs. One more method to calculate this is to subtract direct cost from revenue and dividing it with revenue. This ratio does not take into account overheads, taxes, and payroll and interest payments. Operating performance of a company can be figured out with this ratio. Efficiency of the production is revealed by it with respect to the prices of selling the products. Meaningful information can be provided by the comparison of this ratio:
GPP compared with industry average (it should be ensured that method of industry ratio calculation is same): this is an indicator that a company, when compared to industry, is performing good or bad. To get the idea of basic knowledge of the businesses of the company this comparison is helpful
GPP compared between different divisions. to get an idea that further investigation of which division is required this ratio is used. To get the inside knowledge about a company this comparison is very helpful.
GPP compared over time: this means comparing present year with the last year. If ratio of this year increases with respect to the ratio of previous year than it indicates understated cost of sales or overstated revenue. If this ratio decreases it indicates overstated cost of sales or understated cost of revenue. If this ratio changes than some of the reasons leading to thse changes may be changes made in method of production, production mix or any of the legitimate reason.
Written by: Matt
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Tagged as basic knowledge, earnings, efficiency, enhancement, financial performance, financial resources, gpp, gross profit percentage, industry ratio, interest payments, overhead costs, payroll, preference, previous year, product research, ratio calculation + Categorized as Business, Economy articles, Ladership & Management