What is gross profit

What is gross profit? Let’s find out what the definition of gross profit is, how to calculate gross profit, and why gross profit is important, using real-world examples.

⏱️TIMESTAMPS⏱️
00:00 What is gross profit
00:14 Gross profit example
00:43 Gross profit calculation
01:00 Cost of revenue explained
02:31 Gross profit in the income statement
03:35 Gross profit margin percentage
04:19 Gross margin example

You have probably heard of a company called Tesla! Here’s the first part of Tesla’s consolidated statement of operations, or income statement. Gross profit is right here: $6.6B for 2020. Gross profit is calculated by taking total revenues and deducting total cost of revenues. $31.5B minus $24.9B = $6.6B.

Basically, revenue is the number of units sold times the selling price, and cost of revenue is the number of units sold times the cost per unit. Gross profit is the difference between those two: revenue minus cost of revenue.
Now the term “cost of revenue” might be a new one for you. This is also known as “cost of sales”, “cost of goods sold”, or “cost of services sold”. If you sell products, then those products have a cost of goods sold. If you sell services, then those services have a cost of services sold. Because Tesla identifies four types of revenue (automotive sales, automotive leasing, energy generation and storage, and service and other), there are also four corresponding types of cost of revenue. When we review Tesla’s annual report, we will find detailed descriptions explaining each of these lines.
Let’s review the first, and biggest, of those lines. Here’s how automotive sales revenue gets recorded: “We recognize revenue on automotive sales upon delivery to the customer, which is when the control of a vehicle transfers”. The description of the corresponding cost of automotive sales revenue is quite a lengthy one. Some of the key items it includes are: direct parts, material, labor costs, depreciation of tooling and machinery, shipping and logistic costs, warranty expenses, and inventory obsolescence charges. That’s what it takes to build and deliver the car that they sold!

How does #grossprofit fit into the overall #profitandloss statement? Well, it certainly isn’t the only level of profitability you can measure!
Gross profit is revenue minus cost of revenues.
Income from operations is gross profit minus operating expenses: research and development, and selling, general and administrative.
Income before income taxes is income from operations minus interest expense and other income.
Net income is income before taxes minus provision for income taxes.
And net income attributable to common stockholders is net income minus noncontrolling interests.

If you analyze the profit and loss statement of a company, then gross profit in many cases is an excellent place to start. If a company is able to grow revenue, and grow gross profit at the same rate or faster than revenue, then income from operations and net income might grow exponentially.
One important step to take in financial analysis is to make things relative. What is gross profit as a percentage of revenue? In other words, what is the gross profit margin percentage? You calculate gross profit margin percentage by taking gross profit, $6.6B, and dividing it by revenue, $31.5B. The answer for Tesla in 2020 is 21% gross profit margin percentage. So is that high or low? Well, that depends whether you categorize Tesla as a car company and compare them to other companies in the automotive industry, or as a tech company and compare them to other tech companies.

Let’s take a look at a tech company you might have heard of called Facebook. This is its full year 2020 P&L, all the way from revenue at the top to net income at the bottom. Now where is gross profit? This is not listed, Facebook doesn’t provide it to you, but you can easily calculate it yourself by taking revenue minus cost of revenue. $86B of revenue minus $16.7B cost of revenue equals $69.3B of gross profit. To calculate the gross profit margin percentage, we take this $69.3B of gross profit and divide it by $86B of revenue, and get to a stellar 81%! Now that’s a very high gross profit margin percentage. But is it the highest ever recorded? That’s the topic of a different story!

Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, livestreams, classroom sessions, and webinars. Connect with me through Linked In!

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What if a company has two types of revenue (example: services in general and resale of hardware). I cannot simply divide cogs by total revenue, right? I would have to divide only whats related to resale/cogs

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Gross profit = revenue - cost of goods sold

[aishamursalova]

In a period, sales are $140, 000, purchases $75, 000 and other expenses $25, 000. What is the figure gross profit for the year?

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