<- Back

# Gross Profit

Gross profit is a financial term that represents the amount of money a company earns from its sales after subtracting the cost of goods sold (COGS)

## What is gross profit?

Gross profit is a financial term that represents the amount of money a company earns from its sales after subtracting the cost of goods sold (COGS). It reflects the profitability of a company's core operations before considering other expenses such as operating costs and taxes. Gross profit is a crucial measure as it helps assess a company's ability to generate revenue and cover its production costs. Understanding gross profit enables individuals to evaluate a company's financial performance and compare it to industry benchmarks. By analyzing gross profit, investors and analysts can gain insights into a company's efficiency and profitability.

#### Key takeaways

- Gross profit is the revenue a company generates from sales minus the cost of goods sold.
- It reflects a company's core profitability before accounting for other expenses.
- Analyzing gross profit helps assess a company's efficiency and financial performance.

## Explaining gross profit

Imagine you start a business selling handmade jewelry. Gross profit is the amount of money you make from selling your jewelry after considering the cost of materials, tools, and other expenses directly related to producing the jewelry. It helps you understand how much profit you're making purely from the sales of your products.

To calculate gross profit, you subtract the cost of goods sold (COGS) from your total revenue. COGS includes expenses directly associated with producing your products, such as the cost of raw materials, packaging, and any labor directly involved in the manufacturing process.

For example, if you sell jewelry worth £5,000 and your COGS amounts to £2,000, your gross profit would be £3,000 (£5,000 - £2,000). This means that, after covering the production costs, you have £3,000 available to cover other expenses and generate profit.

## Gross profit in the real world

Let's consider a real-world example. Company XYZ, which manufactures and sells smartphones, reports total revenue of £10 million in a given year. After deducting the cost of producing and delivering the smartphones, which amounts to £6 million, the company's gross profit would be £4 million (£10 million - £6 million).

This £4 million represents the profit generated from the company's core operations, specifically from selling smartphones. It indicates how efficiently the company is manufacturing and selling its products and can be used to compare its performance with competitors in the industry.

Analyzing gross profit helps investors and analysts evaluate a company's financial health and profitability. It provides insights into a company's ability to generate revenue and cover production costs. A higher gross profit margin indicates better efficiency and profitability.

## Final thoughts on gross profit

Gross profit is the revenue a company earns from sales minus the cost of goods sold (COGS). It reflects a company's profitability from its core operations before accounting for other expenses. Calculating gross profit helps individuals assess a company's financial performance, efficiency, and ability to cover production costs. By analyzing gross profit, investors and analysts can gain insights into a company's profitability and compare it to industry benchmarks. Understanding gross profit is crucial for evaluating a company's financial health and making informed investment decisions.