Question

How is understanding gross profit margin particularly useful to managers? Investors? Why is it important? Give an example .

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Answer 1

Gross Profit Margin is generally a tool that helps an organization to assess the financial health of the business by analyzing the amount of money remaining from the revenue incurred after the cost of goods sold is accounted. The importance of the gross profit margin is quite visible because an overall assessment of the organization is determined by the same.

Managers need to understand the importance of this factor because while making a decision they can actually consider the factor and adopt the decision based on the same. Decisions that may affect the overall financial condition of the business should be avoided.

Investors on the other hand will get an idea how the organization is doing financially and if their investment will result fruitful or not, they can direct their decisions based on what they derive from the understanding of the Gross Profit Margin of the organization on which they plan to invest.