Gross margin ratio is a profitability ratio that contrasts the gross profit margin of a company to the internet earnings. This ratio measures how rewarding a business sells its stock or product. To put it differently, the gross benefit ratio is fundamentally the percent markup on the product from its price. Here is the pure benefit from the sale of stock that may visit paying expenses.
Gross margin ratio is frequently confused with all the benefit margin ratio, however, the 2 ratios are entirely distinct. Gross margin ratio only considers that the price of products sold in its calculation since it measures the sustainability of selling stock. Gain margin percentage on the other hand considers other costs.
Gross margin ratio is calculated by dividing gross margin by internet sales.
Gross margin ratio is a profitability ratio that measures how profitable a company can sell its inventory. It only makes sense that higher ratios are more favorable. Higher ratios mean the company is selling its inventory at a higher benefit percentage.
High ratios can typically be achieved in two ways. One way is to purchase the inventory very cheaply. If retailers can obtain a big purchase discount when they purchase their inventory from the manufacturer or wholesaler, their gross margin will be higher because their costs are down.
The second way retailers can achieve a high ratio is by marking their goods up higher. This obviously has to be done competitively otherwise goods will be too expensive and customers will shop elsewhere.
A company with a high gross margin ratios mean that the company will have more money to pay operating expenses like salaries, utilities, and rent. Since this ratio measures the benefits from selling inventory, it also measures the percentage of sales that is used to help fund other parts of the business. Here is another great explanation.
Assume Jack’s Clothing Store spent $100,000 on inventory for the year. Jack was able to sell this inventory for $500,000. Unfortunately, $50,000 of the sales were returned by customers and refunded. Jack would calculate his gross margin ratio like this.