Gross Profit Margin is a way to measure how much money a business makes from selling its products or services.
The Gross Profit Margin is the ratio Gross Profit to Revenue in percent. It shows how much earnings power the company has. Gross Profit Margin must be greater than 40% or greater than 30% for undiscovered companies. More is better.
Equations
Company with a Durable Competitive Advantage:
Undiscovered Company:
Example 1
Date: May 11, 2012
Company: IBM
Price/Share: $201.17
Gross Profit: $50.138 Billion
Revenue: $106.916 Billion
Gross Profit Margin
IBM's Gross Profit Margin is 46.89%, thus the company has good earnings power.
Example 2
Date: April 2011
Company: Ford Motor Corporation
Price/Share: $15
Gross Profit: $20.158 Billion
Revenue: $128.954 Billion
Gross Profit Margin
Ford's Gross Profit Margin is 15.63%, which is less than 40%. This means its earnings power is very low. A very low earnings power could be an indication of a company in a very price competitive industry.