What Is Gross Profit?

Gross profit is a financial metric that represents the profit a company earns from its core business operations after deducting the direct costs associated with producing or delivering its goods or services. It is calculated by subtracting the cost of goods sold (COGS) from the total revenue generated by the company.

The formula for calculating gross profit is as follows:

Gross Profit = Revenue – Cost of Goods Sold

Revenue refers to the total amount of money earned by the company from sales of its products or services. The cost of goods sold includes the direct expenses directly related to producing or acquiring the goods that are sold, such as the cost of raw materials, manufacturing costs, and direct labour costs.

Gross profit provides insight into the efficiency and profitability of a company’s core operations. It indicates how much money the company has available to cover its operating expenses, such as salaries, rent, utilities, and other overhead costs. It does not include indirect expenses, such as marketing and administrative costs, which are accounted for separately in the operating profit or net profit calculations.

Gross profit is an important metric for assessing the financial health of a business and is often used in financial analysis and comparison between different companies or industries.