What ratio is referred to as gross profit divided by revenue?

The ratio that is referred to as gross profit divided by revenue is known as gross margin. This measurement indicates the percentage of revenue that exceeds the cost of goods sold (COGS). Gross margin is an essential metric for assessing the financial health and efficiency of a company in its production processes. It provides insights into how well a company can manage its production costs relative to its sales revenue.

Understanding gross margin is critical for a startup, as it helps the founders gauge how much profit is left over for operating expenses and other costs after accounting for the direct costs of producing goods or services. A higher gross margin indicates that a company retains more profit from each dollar of sales, which can be vital for funding growth and covering other expenses.

In contrast, net margin, operating margin, and profit margin refer to different calculations that involve net earnings after various costs and expenses have been deducted, such as operating expenses, interest, or taxes. Each of these margins serves different purposes in financial analysis but is distinct from gross margin. The clarity provided by gross margin is particularly valuable in the context of early-stage businesses assessing their pricing strategies and cost control.