Gross Profit Ratio Formula & Example

Definition: Gross Profit Ratio is the ratio of gross profit to net turnover expressed as a percentage. It is also known as "Gross profit as a percentage of net turnover" or "Gross profit percentage/margin".

Formula:
GP Ratio = (Gross profit / Net sales) * 100%

Example 1:
Kent Ltd has a total sales of $700,000, Sales returns $30,000, and Cost of goods sold $500,000. Calculate GP ratio.

Solution:
Gross profit = (700000 - 30000) - 500000 = $170,000
GP Ratio = (170,000 / 670,000) * 100% = 25.37% (correct to 2 decimal places)

Example 2:
Calculate the GP percentage, given the following figures:
Total purchases $23,500
Stock at start of year $88,000
Stock at end of year $28,000
Purchases returns $3,500
Sales returns $40,000
Total sales $250,000

Solution:
Net purchases = Total Purchases - Purchases returns = 23500 - 3500 = $20,000
Cost of Sales = Stock at start + Net purchases - Stock at end =  88000 + 20000 - 28000 = $80,000
Net sales = Total sales - Sales returns =  250000 - 40000 = $210,000
Gross Profit = Net sales - Cost of sales =  210000 - 80000 = $130,000

GP percentage = (GP / Net sales) * 100% = (130000/210000) *100% = 61.90%

* Next: Net Profit Ratio Formula & Example

Author

Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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