What is the meaning of 'gross profit'?

Gross profit is defined as the difference between sales revenue and the cost of goods sold (COGS) before any other expenses are taken into account. This measure indicates how efficiently a company is producing its goods in relation to its sales. By focusing solely on sales revenue and COGS, gross profit provides a clear view of the core profitability of the company’s product lines or services, without the influence of overhead costs or operating expenses.

This concept is critical for businesses as it helps them assess whether they are making enough profit from their goods to cover additional expenses and contribute to overall profitability. Understanding gross profit thus lays the foundation for further financial analysis, such as determining operating profit and net profit.