Your gross profit ratio tells you how much of each sales $currency_text$ you can expect to use to cover your operating expenses and profit. In other words, it measures the difference between what it costs to produce a product and what you're selling it for. While some ratios uncover trends by looking at the past, the gross profit margin is a tool you can use to chart your company's future.

The formula: Net sales divided by cost of goods sold

A gross profit margin of 0.33:1 means that for every $currency_text$ in sales, 33 percent will cover your basic operating costs and profit.

Some business owners will use an anticipated gross profit margin to help them price their products. While other factors -- such as competition and demand -- may play into pricing decisions, a gross profit margin is a good starting point for product pricing. For example, if a product costs $currency_symbol$8 to produce, and your gross profit margin is 20 percent, you can calculate your pricing by dividing your cost by (1-.0.2). In this case, $currency_symbol$8 divided by .8 would yield a price of $currency_symbol$10.

You can also use your gross profit margin ratio to help you set and monitor sales goals for your company

Because costs for raw materials, labor and manufacturing expenses all play into your profit margin ratio, a change in this ratio over time could mean it's time to look for new suppliers or review your pricing structure.