Gross margin ratio, also called the gross profit margin ratio, is a profitability metric that measures how much profit a company earns after deducting its direct costs (i.e. cost of goods sold). The formula for the gross margin ratio is as follows:

Gross Margin Ratio = (Revenue - COGS) / Revenue

A higher gross margin ratio is preferred because it indicates that the company is generating more profit by selling its inventory. There are two common ways to increase the ratio: 

  1. Purchase inventory at a discount 
  2. Sell sold at a higher price
Reviews Add a review
No reviews yet

More From Corporate Finance Institute®

Browse our top rated business templates. See All
restructuring financial model template preview 1 Restructuring Financial Model Template
This restructuring financial model template is used to demonstrate the financial interactions behind the restructuring process. Adjust this model to…
TMT Financial Model Template Preview TMT Financial Model Template
This TMT financial model template is used to value technology, media, and telecom firms. This model provides a template to…
bank financial model template preview 1 Bank Financial Model Template
This bank financial model template is used to value financial institutions group (FIG) companies. This is a comprehensive model that…
Synthetic Call Chart Option Profit/Loss Graph Maker
This free Option Profit/Loss Graph Maker allows the user to combine up to ten different types of options as well…
Directional Trading Strategies Template Directional Trading Strategies Template
The directional trading strategies template allow users to determine the profit when buying options. This template focuses on directional strategies…
HELOC Calculator Template Home Equity Line of Credit (HELOC) Calculator
This home equity line of credit (HELOC) calculator can calculate the maximum amount of loan a homeowner is eligible to…