Gross Profit to Net Sales Definition and Explanation

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Quick Definition

Gauges how much profit a company is extracting out of every dollar of sales.

Explanation of Gross Profit to Net Sales

The Gross Profit to Net Sales ratio is fundamentally a profitability ratio. By subtracting the Cost of Goods Sold from the Net Sales, we end up with the Gross Profit. Dividing this by Net Sales produces the ratio of profit to sales, basically showing how much profit a company is producing out of every dollar of sales.

Importance of Gross Profit to Net Sales

A decreasing Gross Profit to Net Sales ratio is a negative sign, indicating the company is becoming less profitable. The company may even have an increasing Net Sales, but the cost to the company to generate those extra sales may be degrading profits. This ratio varies wildly between companies and industries, so the best knowledge from this ratio can be gained by measuring it over several periods.