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8
Gross Margin Ratio
Overview
The gross margin ratio, also known as the gross profit margin ratio, is a
profitability ratio
that
compares the gross margin of a company to its
revenue
. It shows how much profit a company
makes after paying off its
cost of goods sold
(COGS). The ratio indicates the percentage of each
dollar of revenue that the company retains as gross profit, so naturally a high gross margin ratio is
desired.
Formula
Interpretation
A low gross margin ratio does not necessarily indicate a poorly performing company. It is important
to compare gross margin ratios between companies in the same industry rather than comparing
them across industries.
For example, a legal service company reports a high gross margin ratio because it operates in a
service industry with low production costs. In contrast, the ratio will be lower for a car
manufacturing company because of high production costs.
Corporate Finance Institute
Financial Ratios
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