Two Minute Tips

Analyzing gross profits

June 5, 2017

Share this article:

Company books and calculator.
Journalists find EBIT and EBITDA helpful because they provide a more useful measure of a company's performance than net income. Photo via Pixabay.

Gross profits measure the difference between the money a business makes from selling goods or services (its revenue), and the cost of producing those goods or services. Analyzing gross profit can help journalists understand how a business is competing in its industry. It can also back up—or refute—managers’ claims of good performance.

A quick measure of competitiveness

Gross profit, recorded on the company’s income statement, is sales revenue minus the cost of goods or services sold. The number is most helpful when it is converted into a percentage called gross profit margin (GPM). GPM is the gross profit divided by sales revenue, and shows how much out of every dollar of sales a company keeps in earnings. It can be compared directly to a company’s GPM in previous years, as well as to the GPM of competitors in the industry.

An important—but incomplete—story

Gross profit analysis ignores all other expenses and revenues, gains and losses. It offers a quick but incomplete analysis of a business. In general:

• If a business creates a superior brand and can charge higher prices than competitors, it should generate a higher gross profit.

• If a business is more efficient than its competitors, meaning the cost of purchasing or producing goods or services is lower than others in the market, it should generate a higher gross profit.

Overall, gross profit can tell you a lot about profit trends in an industry and whether a company is capable of competing. But it isn’t a complete story because it doesn’t consider all income statement line items, such as selling, general and administrative expenses or interest expense. It is, however, an important and easy to analyze measure of performance. (Originally reported by Steven Orpurt)

More Like This...

three people sitting at a table reviewing graphs and charts

The ABCs of funding rounds

Someone might have a great idea for a startup, but it’s not going to go anywhere without money. Initially, investors will start a business with their own savings or borrow

three people presenting to a group of executives in an office

Experts’ tips for evaluating startups

Covering startups can be exciting and frustrating all at the same time. The newest billion-dollar startup can become the hottest topic in the business and tech media overnight, and its

Two Minute Tips

Sign up now.
Get one Tuesday.

Every Tuesday we send out a quick-read email with tips for business journalism.

Subscribers also get access to the Tip archive.

Get Two Minute Tips For Business Journalism Delivered To Your Email Every Tuesday

Two Minute Tips

Every Tuesday we send out a quick-read email with tips for business journalism. Sign up now and get one Tuesday.

Our New Look
The Reynolds Center for Business Journalism is starting 2023 with a new look that we hope better illustrates our core mission to provide accurate and authoritative resources about business journalism, in order to help both reporters and news consumers understand the importance of business news and to demystify the sometimes arcane topics it covers.
Businesses, markets, and economies move in cycles – ups and downs – which is why our new logo contains a “candlestick” chart representing increases as well as downturns, and serves as a reminder that volatility is an unavoidable attribute of modern life. But it’s also possible to prepare for volatility by being well informed, and informing the general public to help level the information playing field is the primary goal of business journalism. The Reynolds Center is committed to supporting that goal, which is why the candlestick pattern in our logo merges directly into the name of our founding sponsor, Donald W. Reynolds.
Our new logo comes with a shorter name. Business is borderless, and understanding the global links in supply chains, trade, and flows of funds and people is essential to make sense of our fast-paced, globalized world. So we’re dropping the word “National” from our name and will aim to provide content that is applicable to business news globally.
We hope you like the new look. Best wishes for 2023!