Which profitability ratio shows the percentage of sales revenue that becomes gross profit after direct costs are paid?

• A. Gross profit margin (GPM)
• B. Net profit margin (NPM)
• C. Operating profit margin
• D. Return on investment

Answer: (A)

The main concept here is how much of each dollar of revenue stays as gross profit after subtracting the direct costs of making the product. Gross profit margin does exactly this: gross profit divided by sales revenue (often shown as a percentage). Gross profit is revenue minus direct costs (cost of goods sold). This ratio shows how efficiently production is turning revenue into gross profit before those indirect costs and other expenses are considered. It’s different from net profit margin, which uses net income after all expenses, and from operating profit margin, which uses operating profit after overheads. ROI relates to return on investment, not profit as a share of sales. So the best choice is gross profit margin.