Gross profit

Gross profit is one of the most commonly used key figures when trying to understand a company's basic earnings. It shows how much the company has left after covering the direct costs of production or purchasing goods – and thus how strong the foundation is for profits, salaries, rent, and other operating expenses.

In practice, gross profit is often one of the first figures you look at when analyzing a company's finances. It gives a clear indication of competitiveness, cost levels, and overall efficiency.

What does gross profit show?

Gross profit is calculated as the difference between:

Revenue
and
Consumption of goods (or direct production costs)

In other words, it is the amount that the company actually "earns" on its goods and services before all other expenses are taken into account. Gross profit therefore sets the stage for the entire company's finances.

A company can have high turnover and still be under financial pressure if its gross profit is low. This makes the key figure central to any assessment of profitability and risk.

How to calculate gross profit

The formula is straightforward:

Gross profit = Revenue – Cost of goods sold

Example:
Revenue: DKK 10,000,000
Cost of goods sold: DKK 6,000,000
Gross profit: DKK 4,000,000

This amount must cover the company's:

labor costs
rent
marketing
administration
depreciation
other costs
and hopefully end up with a profit

Gross profit margin

In order to compare developments between years or between different companies, the gross profit margin is often used.

Formula:
(Gross profit / Revenue) × 100

Example:
DKK 4 million in gross profit
DKK 10 million in revenue
= 40% margin

The margin shows how much the company earns per dollar of revenue and is a powerful management tool in both pricing and cost control.

Why is gross profit important?

Gross profit provides insight into whether the company:

earns enough from its products
has control over purchase prices
has efficient production
matches market price levels
can absorb fluctuations in commodity prices
has the resilience to handle competitive pressure

A decline in gross profit can be one of the earliest signs that the economy is under pressure. At Collectia, we often see that companies with declining margins over time face greater challenges with their ability to pay – because operations leave too little profit to cover fixed expenses.

Therefore, gross profit is also relevant in credit and risk assessment.

Typical reasons for changes in gross profit

Gross profit is often affected by:

rising commodity or purchase prices
changed product mix
lower sales prices or tougher competition
inefficient production
high discount
increased waste or shrinkage

Small changes in purchase prices or efficiency can have a big impact because the key figure is so high up in the income statement.

How can a company improve its gross profit?

There are several classic techniques:

Optimize purchasing agreements or renegotiate prices
Streamline production, reduce waste, or optimize processes
Raise prices if the market can bear it
Differentiation of product mix so that more high-margin products account for a larger share
Automation that can reduce production costs

When gross profit increases, the entire economy is strengthened – and the risk of payment problems decreases accordingly.

Gross profit in risk analysis and credit assessment

For B2B collaborations, gross profit is an important indicator of how robust the company is. Low or declining gross profit often means:

lower liquidity
weaker buffer against fluctuations
greater risk of late payments
less flexibility in operations

In Qatchr, our credit platform, you can gain insight into gross profit via accounting data in a credit report or as a calculated value when the figure is not directly stated in the annual report. This allows you to spot changes early and react before problems develop.

FAQ

Are gross profit and gross margin the same thing?
The terms are often used interchangeably, but gross profit is typically associated with financial statements, while gross margin is often used in relation to products or individual items.

Why is gross profit falling?
Often due to higher costs, incorrect pricing, competition, or inefficiency.

How can gross profit be improved?
Through better purchasing, optimized production, adjusted pricing, or a changed product mix.