On the IFRS Income Statement there’s a line labeled as ‘gross profit’. It’s just below ‘revenue’ and ‘cost of sales’ and as it happens, reflects earnings left from deducting costs necessary to make a sale happen from revenue earned. Yes, it’s the first total displayed on the income statement, but it’s there for a reason.

Gross profit or gross income is the residual profit after selling a product or a service to someone and subtracting any expense associated with its purchase, production and the sale itself. What it essentially shows, is whether you are making profit or loss with the sales. You may think that c’mon, every sale is a profit, but is it so?

Insight into companies performance

Gross profit is not just the first total line, but also probably the most discussed means of measure when it comes to assessing company’s performance. What it essentially reflects and provides information about, is the efficiency of usage of resources. It indicates amongst other things how management has used labor, material, supplies and equipment, regardless of whether it’s a production company or service provider.

Measurement

Usually the numbers of revenue and cost of sales are the biggest on the income statement and comparing them is more confusing then useful. What is used is the simple percentage and in this case it’s called ‘gross profit margin’ or simply ‘margin’. Let’s say a company makes 1 million EUR worth of sales over a period and its associated cost of sales is 0, 6 million EUR. Mathematically the ‘margin’ is 40%. The ‘margin’ is calculated as follows: gross profit, which in this case is 0, 4 million EUR divided by revenue, which is 1 million EUR.

This 40% is a higher ‘gross profit margin’ and not accustom to most companies, but note that the margins vary significantly from industry. However, companies within the same industry and region may be compared using this simple mathematical means. Be careful with the accounting framework used for recognizing and measuring sales and expenses however as they may make you compare apples with oranges. Usually the framework or GAAP applied is disclosed amongst the first notes of the annual report or financial statements.