Gross Margin Ratio Definition
Gross margin ratio is the profitability ratio which is used to measure the gross margin of the business to the net sales. This ratio tells that by selling the inventory or merchandise how much profit company gain.
From the sales this profit gain which is used to pay the operating expenses of the business.
Gross margin ratio and profit margin ratio are a totally different ratio. Because in gross margin ratio you can calculate the cost of goods sold because it is used to measure the profitability from the sold inventory. Whereas profit margin ratio is used to consider other expenses.
Gross Margin Ratio formula calculated by dividing the gross margin by net sales that is:
Gross margin ratio = gross margin/net sales
Gross margin of any business we can calculate by subtracting the cost of goods sold from net sales. Net sales can be calculated by the difference in gross sales and return or refund. Then after getting the values, we can put in the above formula to calculate the gross margin ratio.
Gross margin ratio is the profitability ratio which used to find that how much profit company earned by selling its inventory. If the ratio is high then the company is profitable as compared to the company of low gross margin ratio.
There are 2 ways to get high margin ratio in any business. The first way is to buy inventory cheap which you may get from wholesaler or manufacturer at a low price. Due to the cheap cost of the inventory, the gross margin of that inventory is high.
The second way is to sold goods at a higher profit for achieving the goal of high margin ratio. If the sold is not competitive in the market then because of too expensive goods customer shop elsewhere.
So the company which has a high gross margin can easily pay the operating expenses such as rent, salaries etc.
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