Gross Profit Ratio

The Gross Profit Ratio measures the gross margin earned by a business as a percentage of its revenue from operations. It tells you what portion of every rupee of sales is left after paying the direct costs of producing or purchasing the goods sold.

Formula

Gross Profit Ratio = (Gross Profit / Net Revenue from Operations) × 100

What it tells you

This ratio reveals the basic profitability of the core business activity — buying and selling goods. A higher ratio is generally a good sign because it means the company has a healthy margin to cover all its operating expenses (like salaries, rent, selling costs) and non-operating expenses (like interest, losses). It also shows how efficiently the business manages its purchase and sales policies.

What causes it to change

A change in the Gross Profit Ratio can come from three sources:

• A change in the selling price of goods.
• A change in the cost of revenue from operations (purchase cost, direct expenses).
• A combination of both. …