The Importance of Gross Profit

by WesleyC; Updated September 26, 2017
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Gross profit is a calculation of how much money is left over from a sale once the cost of the goods sold (COGS) has been subtracted. It is the amount of money a company has made from selling its product or service.

Calculation

Gross profit is the amount of profit that comes directly from the sale and the cost to produce a product. Other costs that are a part of the business, like depreciation and utilities, are not included in calculating gross profit, because they do not directly affect the cost to produce the good that was sold, according to Maria Thompson from All Business.

Importance

Gross profit is extremely important to a company when evaluating the business and sales, because it tells whether the company has made money or lost money on its sales. This is one of the most important aspects of evaluating a company. In the most general sense, if a for-profit company is not making a profit, it is not succeeding.

Uses

Gross profit is used to understand how efficient a company is by evaluating its gross profit compared to other companies. According to Investopedia.com, if a company is producing more gross profit by lowering costs or raising sales than another company, it is more efficient and has more money to reinvest to better itself.

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