Gross profit: What is it and how to calculate it?

Gross profit is a measurement that can help show how efficiently your business turns products and services into profit. Knowing how to calculate gross profit can give you a better sense of the financial health of your business and how effectively your company is using resources during business operations.

Continue reading to learn more about gross profit and how to calculate it.

What you’ll learn:

• Gross profit measures profitability by focusing on product-specific costs.

• To calculate gross profit, subtract the total cost of goods sold (COGS) from the total revenue.

• Small-business owners (SBOs) can calculate gross profit to assess how efficiently their business uses labor and material costs and to identify which products and services are most profitable.

• Along with gross profit, metrics like gross profit margin, net profit, EBITDA and operating profit provide further insight into a business’s profitability to better evaluate its overall financial health.

Gross profit is how much profit a business earns after subtracting the total costs of producing and selling its products or services. It can sometimes be referred to as sales profit or gross income, and it’s typically listed as a line item on a business’s income statement. It’s calculated by subtracting COGS from sales revenue. This simple formula helps measure the value your products or services bring to the business. 

The formula to calculate gross profit is total revenue minus COGS.

Total revenue − COGS = Gross profit

Here’s a closer look at the key components of the gross profit formula:

• Total revenue: The amount of money earned from the sale of your business’s products or services. This figure usually isn’t adjusted to account for business expenses—like overhead, taxes or interest—it only reflects the money earned from sales. 

• COGS: The direct costs associated with the production of a good or service. This typically includes variable costs—or those that change as production output changes—such as labor costs for staff directly involved in production. COGS can also include costs associated with producing or manufacturing a business’s products or services, like materials, packaging, shipping and equipment operation costs.

As an example of calculating gross profit, consider a donut shop that had $209,060 in total revenue and $122,155 in COGS. In this example, the total gross profit for the first quarter of 2026 is $86,905 using the following calculation:

$209,060 − $122,155 = $86,905

With this business, variable expenses include raw materials for making the dough, along with icing, coffee drinks, paper goods, cups, lids, toppings and add-ons, and wages. To calculate gross profit of the entire business for the first quarter of the year, you need to total the revenue and then subtract the variable costs (COGS).

The spreadsheet to calculate the gross profit might look something like this:

Imaginary Donuts Inc.: Gross profit calculation (Q1 2026)

Gross profit can be an important metric for SBOs to calculate because it can be an indicator of a company's overall financial health. It shows how much profit a business’s offerings generate before accounting for operating expenses. It also highlights how efficiently the business manages production costs. A high gross profit can suggest that product or service pricing, production processes and material choices are contributing to strong profitability.

Investors might also ask about a business’s gross profit to evaluate how the company manages its production costs and overall profitability. And this metric can be used by both SBOs and investors to understand the impact of price changes on profitability.

Gross profit can also reveal whether a product is worth selling. A low gross profit may signal a need to improve production, renegotiate supplier contracts or discontinue the item. Insights into gross profit can also inform larger decisions about things like managing cash flow during downturns or reinvesting after a strong quarter.

Gross profit is measured by subtracting COGS from revenue, which, compared to other financial metrics, provides a narrower lens of profitability related to products and services. Comparing gross profit to other data points—like gross profit margin, net profit, EBITDA and operating profit—can provide different insights into pricing strategy, cost structure or operational efficiency. And when reviewed with other metrics, gross profit can help you better understand how a company is performing overall.

Gross profit margin is identified as a percentage or ratio, whereas gross profit represents a fixed dollar amount. And while similar in name, gross profit and gross margin shouldn’t be used interchangeably.

Since a company’s gross profit can vary depending on factors like company size and industry, most businesses calculate their gross profit margin to get a better sense of their business performance. Gross profit margin indicates the percentage of your business revenue that is profit, and it’s helpful when comparing your business to other businesses in the industry. 

To calculate your gross profit margin, divide your gross profit by your total revenue and multiply it by 100:

Gross profit ∕ Total revenue ✕ 100 = Gross profit margin

Net profit, or net income, measures profitability after all expenses—not just product-specific costs—whereas gross profit only considers COGS. Gross profit could be a better indicator of how efficiently a company uses labor and supply costs to produce its goods and services. Net profit, on the other hand, provides a more realistic picture of overall profitability.

EBITDA takes a broader view of a business’s financial performance than gross profit does by factoring in operating expenses, while excluding financing and accounting decisions. While gross profit evaluates product-level margins, EBITDA is often used to assess overall operational performance and cash flow potential.

Investors and lenders frequently consider EBITDA when comparing companies across industries, as it removes factors such as taxes and financing decisions. This makes it easier to compare companies on an apples-to-apples basis.

Operating profit looks deeper into how profitable a business is by subtracting costs like rent, salaries or marketing from gross profit. So, in short, if you want to know whether your product or service is working, look at gross profit. If you want to know whether the business as a whole is running efficiently, look at operating profit.

While gross profit and operating profit both show how much money a company is making, gross profit is more of a quick check on whether your core offering is profitable. Operating profit provides a more detailed view by accounting for everyday business expenses, too.

Here’s more information about what gross profit is and how it compares to other financial metrics:

Knowing your business’s gross profit can help inform important business decisions, which could be key to your company’s success. When you understand which goods and services are most profitable—and by contrast, which ones are straining your earnings—you can gain clearer insight into how your business is performing overall. This means you may be more empowered to make strategic decisions—whether they’re about growing your business, weathering hard times or developing a plan to improve performance.

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