The Gross Profit Margin ratio is a very important profitabilty ratio used widely in all industries and businesses and it is very important to a small business owners like Felix & Michael because it gives them a very clear idea of what kind of cushion a small business has after it has paid for its cost of goods sold. This cushion is what determines the profitablity of a business and the next item that is subtracted from the Gross Profit to get to the operating income is of course the operating expenses. Thus having a good Gross Profit Margin ratio is critical to all small businesses like Central Plumbing and Heating

The Gross Profit Margin ratio is a very important profitability ratio used widely in all industries and businesses and it is very important to a small business owners like Felix and Michael because it gives them a very clear idea of what kind of cushion a small business has after it has paid for its cost of goods sold. This cushion is what determines the profitability of a company and the next item that is subtracted from the Gross Profit to get to the operating income is of course the operating expenses. Thus having a good Gross Profit Margin ratio is critical to all small businesses.

Since Central Plumbing and Heating is a service business that does not have any cost of goods sold, the gross profit number is the same as the sales number for the firm. Thus in this case the gross margin is 100% for all the three years of 2015, 2016 and 2017 given that there is no cost of goods sold. It is important to understand however that if the firm were to partner with another contractor on a particular job, and had to pay out a certain percentage of the income to the other sub-contractor, they would see a cost of goods sold. For example if Central Plumbing and Heating were to work on a large contract for landscaping an office complex working with ABC Plumbing and the total sales from these transactions resulted in an income of $100,000 with the proceeds being split evenly between both firms. the cost of goods sold for Central Plumbing and Heating would be $50,000 since it would be paying that amount to ABC Plumbing. Thus in this instance the gross profit margin for Central Plumbing and Heating would be 50%.

In order to be realistic however, instead of using the gross profit for this calculation, we have simply entered in the Profit before Interest & Taxes to calculate the Gross Profit margin. This analysis will of course produce the same result as the operating profit margin ratio covered in the previous section.

Quick Links:

1. Go to the Corresponding Template section for this industry.
2. Go to the Corresponding Questionnaire section for this industry.