This ratio is used mainly for manufacturing businesses or those that purchase and further develop materials for sale. It measures the value added to purchased materials through the manufacturing or development process. It is usually presented as a percentage and represents the extent to which the core operations of the business is generating funds to cover other costs of the business and sufficient net profit.

There is no normal gross profit margin for any business, although a positive gross profit is essential for even minimal success. The higher the better is the rule for gross profit margin.

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