The Gross Margin Ratio, also referred to as the gross profit margin ratio, is a part of profitability ratio in which the gross margin of a company to is compared to its revenue. It gives a clear picture of how much profit a company earns after paying off its Cost of Goods Sold (COGS).

High ratios can be accomplished through some ways. One of them is to buy inventory at low prices. That’s possible if retailers can crack a big purchase discount while buying their inventory from the manufacturer or wholesaler, their gross margin will automatically be higher as their costs are down.

Another way a firm can achieve a high ratio is by releasing their products with a higher price tag. This obviously has to be done keeping in the mind the competitor’s price or else the goods will be too expensive and customers will shop elsewhere.

Formula of Gross Margin Ratio

Gross Margin Raio = Gross Margin/Net Sales

Example of Gross Margin Ratio

A firm has net sales of $600,000 and its cost of goods sold is $400,000. This indicates its gross profit is $200,000 (cost of goods sold of $400,000 gets subtracted from the net sales of $600,000) and its gross margin ratio is 25% (gross profit of $200,000 divided by net sales of $800,000).