The Gross Profit Ratio is a profitability ratio that allows managers to compare gross profits to net sales revenue. It requires calculations of gross profits and net sales, and the final ratio is usually expressed as a percentage.
What is Gross Profit Ratio For?
Gross Profit Ratio is a profitability ratio used for comparing a hotel’s gross profits and its net sales revenue. In general, a higher ratio signals better profitability.
The Gross Profit Ratio can be compared to last year’s ratio to determine hotel performance year-to-year. It can also be compared against competitor ratios to determine performance within the industry.
Benefits of Gross Profit Ratio
Gross Profit Ratio is a useful metric to help revenue managers understand how it can change prices on a hotel’s products or services. The ratio provides a guideline for how much a hotel can afford to decrease prices without incurring a loss. Gross Profit Ratio also gives revenue managers the benefit of making annual comparisons. An annual improvement in Gross Profit Ratio is a good indicator of a hotel’s financial improvement.
Limitations of Gross Profit Ratio
The Gross Profit Ratio only accounts for a hotel’s variable costs. It does not include some important fixed costs, such as rent paid, marketing expenses, and employee salaries, like some other KPIs do — i.e. GOPPAR, RevPAR, and Labour Cost Ratio.
Additionally, some revenue managers may access competitors’ Gross Profit Ratios through industry associations, business libraries, and other online web resources. However, any comparison against competitors’ Gross Profit Ratios must take accounting systems and practices into account if accuracy is to be ensured.
How is Gross Profit Ratio Calculated
Gross Profit Ratio is calculated by dividing gross profit by net sales. Some managers prefer this ratio expressed as a percentage, in which case the result of the above division is then multiplied by 100.
Example of Gross Profit Ratio Calculation
Gross Profit Ratio = (Gross Profit / Net Sales) x 100
Gross Profit = $2,300,000
Net Sales = $9,550,000
Gross Profit Ratio = ($2,300,000 (GP) / $9,550,000 (NS)) x 100 = 24.08%