Gross Profit Margin

Formula

Gross Profit Margin = (Gross Profit / Net Sales)​ × 100%

Where:

Gross Profit = Net Sales − Cost of Goods Sold (COGS)

Net Sales = Sales − Sales Returns/Discounts

Explanation

Gross Profit Margin measures how efficiently a company produces or purchases its goods and sells them at a profit.

It shows the percentage of sales revenue left after covering direct production costs (materials, direct labour, and manufacturing overheads).

A higher GPM indicates:

• Better cost control
• Strong pricing power
• Higher profitability at the core business level

A lower GPM may indicate:

• Rising production costs
• Poor pricing strategy
• Intense competition

Satisfactory Level

There is no single “perfect” GPM

A margin is considered satisfactory when it:

• Is consistent over time
• Is comparable or better than industry average
• Covers operating expenses and contributes to net profit

General guideline:

• >30% → usually considered good for many industries
• <20% → may raise concerns unless industry norm is low

Industry Norms (Approximate)

Industry	Typical GPM
Manufacturing	20% – 40%
Retail	15% – 35%
Food & Beverage	30% – 60%
Technology / Software	60% – 80%
Construction	10% – 20%

Example

Modern More Sdn. Bhd.

• Net Sales: RM500,000
• Cost of Goods Sold: RM350,000

Step 1: Calculate Gross Profit

Gross Profit = 500,000 − 350,000 = RM150,000

Step 2: Calculate Gross Profit Margin

GPM = (150,000 / 500,000) × 100% = 30%

Interpretation:

The company earns 30 sen gross profit for every RM1 of sales, which is generally satisfactory for a manufacturing firm.

Summary

• GPM focuses on core operations only
• It does not include operating or financing costs
• Always compare across years and with industry averages