What it is:

The gross profit margin ratio indicates how efficiently a business is using its materials and labor in the production process. It shows the percentage of net sales remaining after subtracting cost of goods sold. A high gross profit margin indicates that a business can make a reasonable profit on sales, as long as it keeps overhead costs in control.

When to use it:

This figure answers the question "Am I pricing my goods or services properly?" A low margin - especially in relation to industry norms - could indicate you are underpricing. A high margin could indicate overpricing if business is slow and profits are weak.

The formula:

Gross Profit divided by Total Sales.

Calculate your gross profit margin:

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