This is a high ratio in the apparel industry. Jack would calculate his gross margin ratio like this.Īs you can see, Jack has a ratio of 78 percent. Unfortunately, $50,000 of the sales were returned by customers and refunded. Jack was able to sell this inventory for $500,000. Here is another great explanation.Īssume Jack’s Clothing Store spent $100,000 on inventory for the year. Since this ratio measures the profits from selling inventory, it also measures the percentage of sales that can be used to help fund other parts of the business. This obviously has to be done competitively otherwise goods will be too expensive and customers will shop elsewhere.Ī company with a high gross margin ratios mean that the company will have more money to pay operating expenses like salaries, utilities, and rent. The second way retailers can achieve a high ratio is by marking their goods up higher. If retailers can get a big purchase discount when they buy their inventory from the manufacturer or wholesaler, their gross margin will be higher because their costs are down. High ratios can typically be achieved by two ways. Higher ratios mean the company is selling their inventory at a higher profit percentage. It only makes sense that higher ratios are more favorable. Gross margin ratio is a profitability ratio that measures how profitable a company can sell its inventory.
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