What Is Profit? Definition, Profit Margin Formula & How to Calculate Gross Profit
Learn what profit means in accounting, how to calculate profit margin, and how to determine gross profit. Understand key formulas and how they help analyze business performance.
What Is a Profit?
Profit is the financial gain a business earns after subtracting all its costs from its total revenue.
It represents the amount left over once expenses such as salaries, materials, rent, and taxes have been paid.
Profit is a key indicator of a company’s performance because it shows whether the business is generating more income than it spends.
Companies often measure different types of profit, such as gross profit, operating profit, and net profit, to understand performance at various stages of their operations.
How to Calculate Profit Margin
Profit margin measures how much profit a business makes from its revenue and expresses that relationship as a percentage.
It shows how efficiently a company turns sales into profit.
The basic profit margin formula is:
Profit Margin = (Profit ÷ Revenue) × 100
This percentage helps investors, managers, and analysts compare profitability across different periods or against other businesses, regardless of size.
How to Calculate Gross Profit
Gross profit focuses on the profit earned from core business activities before accounting for overhead costs.
It is calculated by subtracting the cost of goods sold (COGS) from total revenue.
The formula is:
Gross Profit = Revenue – Cost of Goods Sold
Gross profit helps businesses evaluate how efficiently they produce or source their products and is a fundamental measure for understanding pricing, production costs, and overall financial health.
