What is Gross Profit Margin?
Gross profit margin is a profitability ratio that shows what percentage of revenue remains after deducting the direct cost of goods or services sold (COGS), before operating expenses, interest, and taxes. It is calculated as (Revenue – COGS) / Revenue. It measures core production or trading efficiency.
How It Works
- Gross Profit = Revenue – Cost of Goods Sold.
- Gross Profit Margin = Gross Profit / Revenue * 100.
- Drivers: pricing power, product mix, input cost management, scale.
- Compare across periods to spot pricing pressure or input cost inflation.
- Industry-dependent: software 70-85%, retail 20-35%, contracting 8-15%.
Saudi Context
Saudi SaaS companies, jewelry retailers, and luxury auto dealerships operate at high gross margins, while construction, contracting, and commodity trading work on much thinner margins. ZATCA scrutinizes gross margin trends during transfer pricing audits for cross-border related-party trade.
Example
A wholesaler reports SAR 20 million revenue and SAR 14 million COGS. Gross profit = SAR 6 million. Gross profit margin = 6 / 20 = 30%. A drop from 32% the prior year suggests either price pressure or input cost increases that warrant management attention.