CompanyGraph
Isolates revenue minus direct production costs, exposing the raw margin available to cover operating expenses, interest, and profit.
Gross profit is revenue minus the cost of goods sold. It shows how much the company earns from its products or services before paying operating expenses, interest and taxes.
Gross profit represents the profit remaining after subtracting direct production costs from revenue. This fundamental metric shows how much money is left to cover operating expenses, interest, taxes, and generate net profit. Gross profit reveals the core profitability of a company's products or services before considering overhead and administrative costs.
The calculation:
Gross Profit = Revenue - Cost of Revenue (COGS)
For example, if a company has $1 billion in revenue and $600 million in cost of revenue, gross profit is $400 million.
Gross Margin = Gross Profit / Revenue × 100
In the example above, gross margin is 40%.
Why gross profit matters:
- Business model viability: Insufficient gross profit means no path to profitability
- Competitive advantage: Higher margins often indicate pricing power or cost advantages
- Operating leverage: High gross profit provides cushion for operating expenses
- Investment capacity: Funds R&D, marketing, and infrastructure
Industry benchmarks:
- Software/SaaS: 70-85% gross margins typical
- Pharmaceuticals: 65-80% gross margins
- Consumer goods: 40-60% gross margins
- Retail: 25-40% gross margins
- Grocery: 15-25% gross margins
- Hardware manufacturing: 30-50% gross margins
Analysing gross profit:
- Margin trends: Improving, stable, or deteriorating over time?
- Peer comparison: Above or below industry average?
- Volume vs. margin trade-off: Some businesses sacrifice margin for volume
- Product mix impact: High-margin and low-margin product balance
Warning signs:
- Declining gross margins: May indicate pricing pressure or rising costs
- Margins below peers: Competitive disadvantage in cost or pricing
- Volatile margins: Suggests limited pricing power or commodity exposure
Gross profit must cover all operating expenses. A company with high gross profit but excessive overhead can still be unprofitable. Examine gross profit alongside operating expenses for the complete profitability picture.
How it relates
RevenueRevenue is the total amount of money the company earned from selling its products or services. It is the top-line number that reflects the overall size of the company's business.−Cost of Goods SoldCost of goods sold is the direct cost of producing the company's products or services. It includes materials, labor and manufacturing costs and is subtracted from revenue to calculate gross profit.=Gross Profit
Gross Profit−Research & DevelopmentResearch and development expenses represent money spent on developing new products, technologies or improvements. High R&D can support future growth but reduces current profit.−Selling, General & AdministrativeSelling, general and administrative expenses include sales, marketing, administrative staff and overhead. These costs support the business but are not directly tied to production.
Where it fits
RevenueRevenue is the total amount of money the company earned from selling its products or services. It is the top-line number that reflects the overall size of the company's business.→Gross Profit→Operating IncomeOperating income is the profit the company makes from its normal business operations after paying operating expenses. It shows the performance of the core business before interest and taxes.→Pre-tax IncomePre-tax income is the company's profit before taxes are deducted. It reflects the combined effect of operating performance and non-operating items.→Net IncomeNet income is the final profit after subtracting all expenses, interest and taxes. It is the bottom line of the income statement and represents the earnings available to shareholders.
Gross Profit