What is gross profit rate?

Gross profit rate, otherwise known as gross profit margin, is a kind of profitability ratio which measures the ability of a company to pay-off expenses using its gross profit. It is expressed in percentage and is also often the basis for evaluating the efficiency of a company's business model. The formula for gross profit rate is Sales Revenue net of Cost of Goods Sold divided by the Sales Revenue.

Let us assume that a company's gross profit margin is 0.25 or 25%. This simply means that for every dollar of sales made, the 25% of it will be set aside to pay for the company's operating and tax expenses and whatever is remaining would be the company's profit for the period. Of course, stakeholders would want a company's gross profit margin to be high. Generally, a high gross profit rate would mean that the company is efficient in lessening the cost of selling its products or services and this somewhat ensures profit for the company.