Glossary
Gross Profit
Sales minus the direct cost of goods
Gross profit is revenue minus only the cost of making or buying the goods. Wages, marketing and other operating costs have not yet been deducted at this stage.
It answers whether the act of selling is itself profitable. Sell for 100 with a cost of 70 and gross profit is 30 — out of which every cost of running the company must be covered.
A thin gross profit means volume cannot save you. Distribution and assembly businesses, where input costs dominate, are typical. Software sits at the other extreme, with almost no cost of sales.
Watching the trend matters. Rising input prices or competition that prevents price increases cut this line first. Flat revenue with shrinking gross profit signals a deteriorating business environment.
Comparing across industries is meaningless. Compare within a sector, or across several years of the same company, to see what has actually changed.