## Definition of Gross Margin Ratio

The gross margin ratio is a percentage resulting from dividing the amount of a company's gross profit by the amount of its net sales. (The gross margin ratio is also known as the *gross profit margin* or the *gross profit percentage* or simply the *gross margin*.)

Companies should be continuously monitoring its gross margin ratio to be certain it is sufficient to cover its selling, general and administrative expenses, interest expense, and to earn a profit.

## Example of Gross Margin Ratio

To illustrate the gross margin ratio, let's assume that a company has net sales of $800,000 and its cost of goods sold is $600,000. As a result, its gross profit is $200,000 (net sales of $800,000 minus its cost of goods sold of $600,000) and its gross margin ratio is 25% (gross profit of $200,000 divided by net sales of $800,000).

Note: Gross margin ratios vary between industries. Therefore, you should compare a company's gross margin ratio to other companies in the same industry and to its own past ratios or its planned ratios.