Learning about investing can be daunting for beginners…
This is where the “What Is…?” series comes in.
In this series, we demystify investing terms for those who are just starting out in the investing world.
Right now, let’s look at the term “gross profit margin” and what it means for you as an investor.
So, What Is Gross Profit Margin?
Gross profit margin is a profitability ratio that shows how much gross profit a company makes for every dollar of revenue generated.
Gross profit is what the company has after subtracting from revenue the cost of goods sold to create that particular product or service.
For example, for a store selling lemonade, one component of cost of goods sold would be the cost of lemons.
The gross profit margin is an important formula in investing. The higher the gross profit margin, the higher the pricing power a company has.
A company with high pricing power could mean that it has an economic moat to keep competitors at bay.
Gross Profit Margin Formula
The formula for gross profit margin can be seen below:
Gross Profit = Revenue – Cost of Goods Sold
Gross Profit Margin = (Gross Profit/Revenue) * 100%
If a company’s gross profit margin is 40%, it means that for every dollar of revenue it receives, the firm makes 40 cents in gross profit.
Calculating Gross Profit Margin of a Listed Company
To illustrate the gross profit margin calculation, let’s use supermarket chain Sheng Siong Group Ltd (SGX: OV8) as an example.
For 2019, the company’s revenue was S$991.3 million while its cost of sales (another name for cost of goods sold) stood at S$724.4 million.
This gave a gross profit of S$266.9 million.
To calculate gross profit margin, we divide S$266.9 million by S$991.3 million and multiply that by 100. Therefore, Sheng Siong’s gross profit margin for 2019 was 26.9%.
In other words, for every S$1 of revenue, it generated around 27 cents in gross profit.
This gross profit margin can then be used to compare with Sheng Siong’s peers to see which is the most efficient company.
Have Burning Questions Surrounding The Stock Market?
Why not check out the Seedly Community and participate in the lively discussion regarding stocks!
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.