How is the Gross Profit Ratio calculated?

The Gross Profit Ratio is a key performance metric that reflects the proportion of money left over from revenues after accounting for the cost of goods sold (COGS). It shows how efficiently a company uses its resources in producing and selling its products.

The calculation of the Gross Profit Ratio specifically involves dividing gross profit by sales. Gross profit is the difference between total sales and the cost of goods sold, which means the formula for the ratio is expressed as:

Gross Profit Ratio = Gross Profit / Sales

This ratio provides insight into the company's financial health. A higher ratio indicates a greater ability to generate profit from sales, which can be crucial for managing expenses and ensuring long-term viability. The correct formula underscores the relationship between gross profit and sales, emphasizing their connection in assessing profitability.

In contrast, the other options do not correctly represent the relationship needed for this ratio. For instance, subtracting sales from gross profit or multiplying them does not yield a meaningful measure of profitability in relation to sales. Dividing sales by gross profit would also not reflect the intended analysis of profit margins in relation to sales revenue.