What is Gross Profit Ratio? What does it indicate?

What is Gross Profit Ratio? What does it indicate?

Gross Profit Ratio indicates the relation between production cost and sales and the efficiency with which the goods are produced or purchased. It reflects the efficiency with which a firm produces its products. A high gross profit ratio indicates that the organization is able to produce at a relatively lower cost. There is no standard ratio for the Gross Profit evaluation. However, the gross profit should be sufficient to cover all operating expenses and to build up reserves after paying all fixed interest charges and dividends.

Formula to calculate Gross Profit Ratio = (Gross Profit/ Net Sales) X 100

What does undue increase in Gross Profit Ratio indicate?

Undue increase in Gross Profit Ratio indicates:

• Over valuation of closing stock or under valuation of opening stock.

• Non consideration of purchase invoices

• Consideration of non sales transactions as sales transactions.

• Decrease in cost of goods sold without any decrease in selling price.

• Increase in selling price of goods sold without any increase in the cost of goods sold.