Gross Profit: What It Is and How to Calculate It

By 

ADAM HAYES

Full Bio

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the University of Lucerne in Switzerland.Adam's new book, "Irrational Together: The Social Forces That Invisibly Shape Our Economic Behavior" (University of Chicago Press) is a must-read at the intersection of behavioral economics and sociology that reshapes how we think about the social underpinnings of our financial choices.

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Updated March 21, 2026

Reviewed by MARGARET JAMES

Fact checked by 

PETE RATHBURN

DEFINITION

Gross profit, also known as sales profit or gross income, is a company's profit after deducting the costs associated with producing and selling its products or services.

KEY TAKEAWAYS

Gross profit equals revenue minus the cost of goods sold (COGS).It measures how efficiently a company produces and sells its goods or services.Gross profit excludes operating expenses such as rent, insurance, taxes, and administrative costs.Gross profit margin shows gross profit as a percentage of revenue and helps compare profitability over time or across companies.

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What Is Gross Profit?

Gross profit is a company's remaining profit after deducting the costs associated with producing and selling its products or services. It's also known as sales profit or gross income.

Gross profit is calculated on a company's income statement by subtracting the cost of goods sold (COGS) from total revenue. Gross profit differs from operating profit, which is calculated by subtracting operating expenses from gross profit.

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Formula for Gross Profit

Gross profit=Net sales−CoGSwhere:Net sales=Equivalent to revenue, or thetotal amount of money generated from salesfor the period. It can also be called net salesbecause it can include discounts and deduc-tions from returned merchandise. Revenueis typically called the top line because it sitson top of the income statement. Costs aresubtracted from revenue to calculate net in-come or the bottom line.CoGS=Cost of goods sold. The direct costsassociated with producing goods. Includes bothdirect labor costs, and any costs of materialsused in producing or manufacturing a company’sproducts.​Gross profit=Net sales−CoGSwhere:Net sales=Equivalent to revenue, or thetotal amount of money generated from salesfor the period. It can also be called net salesbecause it can include discounts and deduc-tions from returned merchandise. Revenueis typically called the top line because it sitson top of the income statement. Costs aresubtracted from revenue to calculate net in-come or the bottom line.CoGS=Cost of goods sold. The direct costsassociated with producing goods. Includes bothdirect labor costs, and any costs of materialsused in producing or manufacturing a company’sproducts.​

Calculating Gross Profit

Gross profit measures a company’s efficiency in producing its goods or services by focusing on the direct costs of production, known as cost of goods sold (COGS). These costs typically include direct materials, direct labor, and certain manufacturing overhead costs associated with production.

Examples of costs included in COGS may include:

• Raw materials

• Direct labor

• Manufacturing supplies

• Factory utilities

• Equipment depreciation used in production

• Factory or production facility rent

• Freight and shipping costs related to inventory or production

Gross profit does not include operating expenses such as administrative salaries, marketing costs, office rent, insurance, interest, or taxes. These costs are deducted later when calculating operating profit and net income.

IMPORTANT

A company's gross profit will vary depending on whether it uses absorption or variable costing. Absorption costs include fixed and variable production costs in COGS, and this can lower gross profit. Variable costing includes only variable costs in COGS, and generally results in a higher gross profit because fixed costs are treated separately.

Gross Profit vs. Gross Profit Margin

Gross profit calculates the gross profit margin, a metric that evaluates a company's production efficiency over time. It measures how much money is earned from sales after subtracting COGS, showing the profit earned on each dollar of sales. Comparing gross profits year to year or quarter to quarter can be misleading because gross profits can rise while gross margins fall.

The terms are similar, but gross profit differs from gross profit margin. Gross profit is expressed as a currency value. Gross profit margin is a percentage. The formula is:

Gross Profit Margin = (Revenue – Cost of Goods Sold) ÷ Revenue x 100

Gross Profit vs. Net Income

Gross profit differs from net profit (also known as net income). Both are indicators of a company's financial health, but they serve different purposes.

FAST FACT

Net income is often referred to as "the bottom line" because it appears at the end of an income statement. It refers to the company's total profit after accounting for all expenses, including operating costs, taxes, and interest.

Gross profit is calculated by subtracting the cost of goods sold (COGS) from net revenue. Net income is calculated by subtracting all operating expenses from gross profit. Net income reflects the profit earned after all expenses. Gross profit focuses solely on product-specific costs.

Gross profit helps evaluate how well a company manages production, labor costs, raw material sourcing, and manufacturing spoilage. Net income assesses whether the operation is profitable when administrative costs, rent, insurance, and taxes are included.

Example of Gross Profit

ABC Company - Income StatementRevenues(in USD millions)Automotive141,546Financial services10,253Other1     Total revenues151,800Costs and expenses Automotive cost of sales126,584Selling, administrative, and other expenses12,196Financial Services interest, operating, and other expenses8,904     Total costs and expenses147,684

We first subtract the cost of goods sold (COGS) from total revenue to calculate the gross profit. COGS totals $126,584 million. Selling, administrative, and other fixed expenses aren't included. Subtract the COGS from revenue to obtain a gross profit of:

$151,800 - $126,584 = $25,216 million

Divide the gross profit by total revenues to determine the gross profit margin: $25,216 ÷ $151,800 = 16.61%. Most businesses have a gross profit margin that falls between 20% and 40%, but this varies significantly by industry.1

Advantages of Using Gross Profit

Gross profit isolates a company's performance of the product or service it sells. Removing the "noise" of administrative or operating costs allows a company to think strategically about product performance and to implement cost control strategies more effectively.

Gross profit is generally more controllable as well. Costs such as utilities, rent, insurance, or supplies are unavoidable and relatively fixed. Gross profit is dictated by net revenue and cost of goods sold, so a company can strategically adjust more elements of gross profit than it can for net profit.

Limitations of Using Gross Profit

Standardized income statements prepared by financial data services may show different gross profits. These statements display gross profits as a separate line item; however, this information is only available for public companies. Investors reviewing the income of private companies should familiarize themselves with the cost and expense items on a non-standardized balance sheet, which may or may not be factored into gross profit calculations.

Gross profit is a useful high-level gauge, but companies must often dig deeper to understand underperformance. A company should investigate all revenue streams and each component of COGS to identify the cause if its gross profit is 25% less than its competitor's.

Gross profit can also be misleading when analyzing the profitability of service sector companies. Service companies may have little or no traditional cost of goods sold, though many report cost of services, which can include direct labor and other service-related costs. Gross profit might suggest strong performance, but companies must also consider "below the line" costs when analyzing profitability.

Explain It Like I'm Five

Gross profit is the money a company has left after paying the costs required to make its product, but before paying for expenses such as office rent, marketing, or taxes.

For example, consider a company with $100,000 in revenue and $75,000 in cost of goods sold (COGS). Selling, general, and administrative (SG&A) expenses are not included in this calculation.

Gross profit = Revenue – COGS
Gross profit = $100,000 – $75,000 = $25,000

This means the company earned $25,000 from its products before paying operating expenses.

What Does Gross Profit Measure?

Gross profit equals a company’s revenues minus its cost of goods sold (COGS). It's typically used to evaluate how efficiently a company manages labor and supplies in production. Gross profit will consider variable costs, which fluctuate compared to production output. These costs may include labor, shipping, and materials.

What Is the Difference Between Gross Profit and Net Profit?

Gross profit is the income remaining after production costs have been subtracted from revenue. It helps investors determine how much profit a company earns from the production and sale of its products. Net profit, also known as net income, is the profit that remains after all expenses and costs have been deducted from revenue. It helps demonstrate a company's overall profitability and reflects the effectiveness of a company's management.

The Bottom Line

A company can gauge how well it manages the product-specific aspect of its business by subtracting its cost of goods sold from its net revenue. Gross profit helps determine whether products are being priced appropriately, whether raw materials are inefficiently used, or whether labor costs are too high. Gross profit helps a company analyze its performance without including administrative or operating costs.