Explanation of Gross Profit:

Also called the Gross Margin and listed on the Income Statement, the Gross Profit is simply the Net Sales minus the Cost of Goods sold.  The Gross Profit figure represents how much of a difference there is in the sales income the company brings in, and the cost of producing those goods or services. 

Importance of Gross Profit:

If the Gross Profit is negative, this means the company uses more money to produce their goods or services than they can collect in sales.  This is called operating "in the red" and the only good thing with a negative Gross Profit is if it is decreasing over time (getting closer to zero), and fast!  Few company's can operate this way for an extended period of time without using their cash reserves or increasing their debt.  Of course, if a company's Gross Profit is positive and increasing over time, this is generally a good trend. 

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