Glossary
Gross profit
Revenue minus cost of goods sold, before operating expenses, interest and tax.
Gross profit is what a company earns from selling its products or services after subtracting only the direct costs of making or acquiring them. It is the first profit line on the income statement, sitting just below revenue and cost of goods sold (COGS). Because it isolates the economics of the product itself, it is the pool from which all other costs, such as salaries, research, marketing, interest and tax, must be paid.
How it works
COGS for a manufacturer includes raw materials, factory labor and production overhead; for a retailer, mainly the purchase cost of the goods it resells; for a software firm, hosting and customer-support costs.
Gross profit versus gross margin
Gross profit is a dollar amount; gross margin is the same figure divided by revenue. A company can grow gross profit while its margin falls, for instance by cutting prices to win volume. Analysts track both: dollars show the size of the earnings engine, and the margin shows its efficiency.
What to watch for
- Classification. Companies have some freedom in what they put in COGS versus operating expenses, which affects comparability.
- Inventory accounting. Methods such as FIFO and LIFO can shift costs between periods when prices are changing.
- One-time items. Inventory write-downs or supply disruptions can depress a single quarter.
- Service businesses sometimes report "cost of revenue" rather than COGS; the logic is the same.