Gross Margin Ratio
Gross margin ratio is a
profitability ratio
that 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.
Formula
Gross margin ratio is calculated by dividing gross margin by net sales.
The gross margin of a business is calculated by subtracting cost of goods sold
from net sales. Net sales equals gross sales minus any returns or refunds.