Term · Profitability & Growth
Gross profit
In briefGross profit is revenue after deducting directly attributable production or cost of sales. It shows the economic quality of product mix, prices and direct costs, before sales, administration and development are taken into account.
Definition
Gross profit is revenue less the cost of production or cost of sales directly attributed to revenue.
How it is calculated
Formula. Gross profit = revenue − cost of sales.
Why it matters for small caps
It shows the economic quality of product mix, pricing and direct costs, before selling, administrative and development expenses.
Common misreadings
- The allocation of costs to gross profit is not always identical between companies. Peer comparisons require consistent accounting and business models.
In the process
Frequently asked
What is gross profit?
It is the amount remaining from revenue after the costs directly associated with the sale have been deducted. Fixed costs for administration or sales are not yet included.
How do you read gross profit in the income statement?
It sits at the top of the income statement and separates the direct costs from the remaining expenses. This reveals the underlying earning power of a business.
What should you watch for in a peer comparison of gross profit?
Companies allocate costs to the cost-of-sales line differently. A comparison is only meaningful with consistent accounting and a similar business model.
Related terms
Sources
Primary
IFRS Foundation – IAS 1 Presentation of Financial Statements
https://www.ifrs.org/issued-standards/list-of-standards/ias-1-presentation-of-financial-statements/
https://www.ifrs.org/issued-standards/list-of-standards/ias-1-presentation-of-financial-statements/
Methodology
IFRS Foundation – IFRS 15 Revenue from Contracts with Customers
https://www.ifrs.org/issued-standards/list-of-standards/ifrs-15-revenue-from-contracts-with-customers/
https://www.ifrs.org/issued-standards/list-of-standards/ifrs-15-revenue-from-contracts-with-customers/
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.