Gross profit margin is a measure of a company’s financial health and efficiency in producing goods. It is calculated by dividing gross profit (net sales minus cost of goods sold) by net sales then multiplying by 100%.
For example, a specialty food company earns $1.5 million in revenue and has $750,000 in cost of goods sold, producing a gross profit margin of 50%. The company's owner uses this figure to compare performance year-over-year and benchmark against competitors in the industry.
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