What is gross profit?

Gross profit is defined as the difference between revenue and the cost of goods sold. This key financial metric indicates how efficiently a company can produce and sell its products. Essentially, it reflects the amount of money that remains from sales after accounting for the direct costs associated with producing those goods, such as materials and labor. By calculating gross profit, a business can assess its production efficiency and pricing strategy, which are critical for understanding overall financial health and making informed strategic decisions.

Understanding gross profit is crucial for evaluating a company's capacity to cover its operating expenses and ultimately generate net profit. This metric serves as a foundational element of profitability analysis and is a vital component of financial statements.