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# Gross Margin Ratio

The Gross Margin Ratio, also referred to as the gross profit margin ratio, is a part of profitability ratio in which the gross margin of a company to is compared to its revenue. It gives a clear picture of how much profit a company earns after paying off its Cost of Goods Sold (COGS).

High ratios can be accomplished through some ways. One of them is to buy inventory at low prices. Thatâ€™s possible if retailers can crack a big purchase discount while buying their inventory from the manufacturer or wholesaler, their gross margin will automatically be higher as their costs are down.

Another way a firm can achieve a high ratio is by releasing their products with a higher price tag. This obviously has to be done keeping in the mind the competitorâ€™s price or else the goods will be too expensive and customers will shop elsewhere.

### Formula of Gross Margin Ratio

Gross Margin Raio = Gross Margin/Net Sales

### Example of Gross Margin Ratio

A firm has net sales of \$600,000 and its cost of goods sold is \$400,000. This indicates its gross profit is \$200,000 (cost of goods sold of \$400,000 gets subtracted from the net sales of \$600,000) and its gross margin ratio is 25% (gross profit of \$200,000 divided by net sales of \$800,000).

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