Understanding companies
Gross profit is revenue minus the direct cost assigned to producing or delivering the goods and services sold. It sits before wider operating expenses such as administration and marketing.
Make it click
A baker subtracts the direct ingredients and production cost of sold loaves from their sales. The remainder must still pay for the shop, staff, systems, interest and tax.
Now put that into markets
Gross profit shows how much economic room remains after the cost of sales. Gross margin divides that amount by revenue so businesses of different sizes can be compared.
Cost classification differs by industry and accounting policy. A software company and manufacturer may assign staff, hosting, freight or depreciation to different lines.
Compare gross margin over time and read the accounting policy. Price changes, product mix, input costs, capacity use and currency can all move it.
A high gross margin does not guarantee overall profitability because operating expenses may be large. Cross-company comparisons fail when cost classifications are inconsistent.
Takeaway
