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