How is gross profit calculated?

Gross profit is calculated by taking sales revenue and subtracting the cost of goods sold (COGS). This calculation reflects the company's efficiency in producing and selling its products, revealing the profit made before deducting operating expenses, taxes, interest, and other costs.

When a firm sells its products, the sales figure represents all income generated from those sales. The cost of goods sold includes all direct costs associated with producing the goods sold, such as material and labor costs. By deducting COGS from sales, gross profit highlights how well a company is managing its production costs relative to its sales revenue.

Understanding gross profit is crucial as it provides insight into the core profitability of a company's operating activities, excluding other financial factors. This metric is often analyzed to assess a company's financial health and operational efficiency, allowing stakeholders to evaluate performance over time or against competitors.