What is gross profit?
Gross profit is a company’s revenue minus its cost of goods sold (COGS) — the absolute dollar amount left after direct production costs, but before operating expenses, interest and taxes. Under IFRS (IAS 1) and US GAAP (ASC 220), gross profit is a presentation line on the income statement that separates production economics from overhead.
Formula
Gross Profit = Revenue − COGS
COGS captures only costs that vary directly with the product or service delivered: raw materials, direct labour, cloud infrastructure for a SaaS workload, payment processing for a fintech transaction. Sales-team salaries, marketing spend and rent belong below the gross profit line, in operating expenses.
Gross profit vs. related concepts
- Gross profit vs. gross margin: gross profit is an absolute amount; gross margin is the ratio (Gross Profit / Revenue).
- Gross profit vs. net income: net income subtracts all operating expenses, interest and tax — gross profit shows only the production gap.
- Gross profit vs. operating profit: operating profit further deducts SG&A and R&D; gross profit stops at COGS.
Why founders track it
Gross profit is the funding source for everything else: R&D, sales, marketing, G&A and finally net income. A company can grow revenue aggressively while eroding gross profit dollars — typical when discounting expands the top line but margins compress faster. Investors read declining gross margin during high revenue growth as a signal that the unit economics do not scale.
Do: track gross profit growth alongside revenue growth, and decompose any margin compression into price, product mix and cost drivers.
Don’t: celebrate top-line growth without checking the gross margin trend — and never present gross profit as EBITDA or operating profit in a pitch deck.