From the course: Running a Profitable Business: Understanding Financial Ratios
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Specific profitability ratios
From the course: Running a Profitable Business: Understanding Financial Ratios
Specific profitability ratios
- Now, let's look at some specific profitability ratios, and we'll start right at the top of the income statement with gross profit percentage. Gross profit is sales minus cost of goods sold. If Nordstrom sells you something for $100 and they pay $65 to buy that thing from their supplier, then Nordstrom's gross profit is $35, and their gross profit percentage is 35%. The fraction of the selling price that Nordstrom gets to keep right off the top. And in a retail organization, or in a manufacturing organization, or an organization that sells a service, you would hope that this gross profit percentage stays stable. And we see here with Nordstrom that it's creeping down just a little bit, just a little bit. There's a host of possible explanations. Maybe the economy is soft, maybe the mix of our customers has changed. But we're going to highlight that issue here with gross profit percentage. Now, the gross profit percentage…
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