Gross Profit Ratio = Gross Profit x 100 ------------------ Net Sales
This ratio is of fundamental importance in the analysis of trading results of any business. A low GP Ratio may suggest a decline in business profitability. This maybe due to higher Cost Of Production, reduced Sales Price or ineffective management. An increase / decrease in GP Ratio in comparison with the previous years is a very significant indicator of effective management. It shows whether the business is progressing or not.