Gross Margin RatioGross margin ratio is a profitability ratiothat compares the gross margin of a business to the net sales. This ratio measures how profitable a company sells its inventory or merchandise. In other words, the gross profit ratio is essentially the percentage markup on merchandise from its cost. This is the pure profit from the sale of inventory that can go to paying operating expenses.Gross margin ratio is often confused with the profit margin ratio, but the two ratios are completely different. Gross margin ratio only considers the cost of goods sold in its calculation because it measures the profitability of selling inventory. Profit margin ratio on the other hand considers other expenses.FormulaGross margin ratio is calculated by dividing gross margin by net sales.The gross margin of a business is calculated by subtracting cost of goods soldfrom net sales. Net sales equals gross sales minus any returns or refunds.