Gross Profit

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Gross profit is Net Sales, or Revenue, minus the cost of goods sold.

Total Revenue - Cost of Goods Sold (COGS) = Gross Profit or Total Revenue - Cost of Revenue = Gross Profit

Gross profit tells you how much money a company earned on goods sold compared to the expenses directly related to creating the good, such as raw materials expenses. Gross profit calculations do not include related expenses such as rent, salaries, research and development, income taxes, etc. that are not directly related to the product. Gross Profit is found on the income statement and is used to calculate the gross margin, which represents the proportion of each dollar of revenue that the company banks as gross profit.

Gross profit calculations can vary depending on which of a company's costs it classifies as Cost of Goods Sold (COGS). COGS only includes costs directly associated with the production of a company's goods, usually costs for materials and the labor directly involved in making the product. How a particular cost is classified, however, can vary from industry to industry and even from company to company within an industry based on management's opinion.

Example

  • In 2007, Company XZY earned $20 billion in revenue from producing Light-weight laptops and they incurred $10 billion in COGS-related expense. Their Gross Profit is therefore $10 billion. ($20 billion - $10 billion = $10 billion)
  • In 2007, Monsanto Company (MON)'s Agricultural Productivity segment generated 29.7% of gross profit.

Gross Profit on Wikinvest

Gross profit is calculated as Revenue minus Cost of Sales.

However, the number may vary from that reported on Yahoo! Finance or Google Finance. This is because cost of sales les data on Wikinvest always excludes depreciation even if the company reports the number with depreciation. Depreciation, on Wikinvest, is reported separately in the operating expenses section of the Income Statement. This treatment provides greater transparency and comparability.

To illustrate how not including depreciation improves transparency, consider two companies: XYZ and BCD. Both companies have revenue of $100 million. Their Cost of Sales are $50 million and $80 million respectively. However, XYZ reports a depreciation line item of $30 million, whereas, BCD includes the depreciation in its cost of sales. This treatment makes their gross profit and, in turn, their gross margin incomparable. In order to compare their margins, an investor should either add depreciation to company XYZ's cost of sales, or subtract depreciation from BCD's cost of sales. Wikinvest choses the latter treatment.


See also

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