Analyzing and using the financial results - Gross margin percentage

As discussed earlier, you can calculate the gross margin percentage by using the following formula:

\text { Gross margin percentage }=\frac{\text { Gross margin }}{\text { Net sales }}

To demonstrate the use of this ratio, consider the following information from the 2000 Annual Report of Abercrombie & Fitch.

($millions)

2000

1999

1998

Revenues

$1,238.6

$1,030.9

$805.2

Gross profit

509.4

450.4

331.4

Gross profit (margin)  percentage

$509.5/$1,238.6 = 41.13%

$450.4/$1,030.9 = 43.69%

$331.4/$805.2 = 41.16%


Abercrombie's gross margin held at a rather high 41-43 per cent over those three years.

You should now understand the distinction between accounting for a service company and a merchandising company. The next chapter continues the discussion of merchandise inventory carried by merchandising companies.