How is gross profit margin used in sales?

Gross margin and profit margin are profitability ratios used to assess the financial health of a company. Both gross profit margin and profit margin – more commonly known as net profit margin – measure the profitability of a company as compared to the revenue generated for a period. Both ratios are expressed in percentage terms but have distinct differences between them.

Profit margin is a percentage measurement of profit that expresses the amount a company earns per dollar of sales. If a company makes more money per sale, it has a higher profit margin.

Profit margin is the percentage of profit that a company retains after deducting costs from sales revenue. Expressing profit in terms of a percentage of revenue, rather than just stating a dollar amount, is more helpful for evaluating a company's financial condition. If a company's $500,000 profit reflects a 50% profit margin, then the company is in solid financial health, with revenues well above expenses. If that $500,000 is a mere 1% over the company's total costs and expenses, then the company is barely solvent, and just the slightest increase in costs may be sufficient to push the company into bankruptcy.

Gross Profit Margin

Gross profit margin is the percentage of company's revenue that exceeds its cost of goods sold. It measures the ability of a company to generate revenue from the costs involved in production.

The gross profit margin is calculated by subtracting cost of goods sold from revenue. The COGS is the amount it costs a company to produce the goods or services that it sells. 

Source : Investopedia