The gross profit percentage, or gross margin, tells the percentage of money a company keeps from its revenue after direct costs are accounted for, and it indicates a company's gross profit margin. To determine the gross profit percentage for a business selling goods, a person takes the company's sales and then subtracts factory ahead, direct materials and direct labor. The person then divides the resulting value by sales to get the gross profit percentage.
Knowing a company's gross profit percentage is helpful, as it can help managers detect problems. If the gross profit percentage is declining, the company may be facing a price decline, an increase in spoilage, higher production costs or more bad debts. A decline can also signal a more competitive marketplace where the company will need to work to cut its costs.