Overview

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
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