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Gross Profit Margin interpretation

Gross profit margin is a key financial indicator used to asses the profitability of a company's core activity, excluding fixed cost. Gross Profit Margin formula is:

Gross profit margin formula

Gross profit margin measures company's manufacturing and distribution efficiency during the production process. It is a measurement of how much from each dollar of a company's revenue is available to cover overhead, other expenses and profits.

The ideal level of gross profit margin depends on the industries, how long the business has been established and other factors. Although, a high gross profit margin indicates that the company can make a reasonable profit, as long as it keeps the overhead cost in control. A low margin indicates that the business is unable to control its production cost.

Gross profit margin can be used to compare a company with its competitors. More efficient firms will usually see a higher margin. Also, it provides clues about company's pricing, cost structure and production efficiency. Therefore, gross profit margin can be used to compare company's activity over time.

For most of the businesses, gross profit margin is affected by seasonality. Generally, in the good months, this margin is higher than in the slower months, when the company may use sales and other marketing tools to attract more customers.

Gross profit margin is related to operating margin, which asses the profitability after including fixed cost and net profit margin, which asses the profitability after including fixed cost, interest expenses and taxes.

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