Gross Profit

Revenue minus the direct costs of producing goods or services.

QUICK ANSWER

Gross profit is the amount of revenue a company retains after deducting the direct costs associated with producing its goods or services, known as the cost of goods sold (COGS). It is the first profitability figure that appears on the income statement and serves as the starting point for calculating operating profit and net profit.

In depth

Gross profit is calculated simply as total revenue minus COGS. It represents the financial resources available to the business after covering the direct costs of production, which can then be used to pay for operating expenses such as sales, marketing, administration, and research and development. A healthy gross profit is necessary but not sufficient for overall profitability since a company can have strong gross profit but still report a net loss if its operating expenses are too high.

Gross profit is most meaningful when analyzed alongside gross margin and tracked as a trend over time. An increasing gross profit in absolute terms is a positive sign of revenue growth, but if COGS is growing faster than revenue, the gross margin will shrink, indicating that the underlying unit economics are deteriorating. For businesses managing multiple product lines or customer segments, analyzing gross profit by segment provides valuable insight into which parts of the business are the most and least profitable, enabling smarter decisions about where to invest and where to streamline.