A company has good gross margin when it is competitive with its industry peers and remains stable in the long-term, according to Investopedia. Profit margins vary greatly from industry-to-industry. For example, the airline industry averages 5 percent, while the software industry averages 90 percent.Know More
Gross profit margin is the proportion of money left over after subtracting the cost of goods sold from revenues. Gross margin is a company's best resource for meeting additional expenses and retaining earnings. It is calculated by subtracting the cost of goods and services from revenue and dividing that figure by revenue. For example, if Company A has $100,000 in revenue and $50,000 in COGS, its gross profit margin is 50 percent. Gross profit margin is used by investors and stock analysts to compare companies in the same industry, notes Investopedia.
Companies with high profit margins are considered superior investments because they build equity faster, have more capital to expand operations and are better prepared to weather a downturn than a low profit margin company, which could be wiped out in a recession, explains Investopedia. Gross profit margin is also used to test the growth and validity of a particular product or service. This factor is important because an item can generate a large volume of sales but not be a viable or competitive investment option because of low profit margins.Learn more about Accounting
Under traditional business theory, the main objective of any business is to make a profit for its owners. Only those business activities that result in the highest profit margin meet this basic objective.Full Answer >
A breakeven analysis is important in evaluating a business investment because it allows owners or operators to understand the costs that must be overcome to earn a profit. If the breakeven point is perceived as too challenging, operators may opt to avoid the risk of making the investment.Full Answer >
Accounting allows businesses to calculate their profit and perform analyses. Accounting is important for determining if a company's earnings reports are accurate, making it important for stockholders and regulators.Full Answer >
A profit and loss statement, or P&L, shows income and expenses over a period of time, such as a month, quarter or year. Categories of income and expense include those normally used by the business.Full Answer >