Gross profit is the profit obtained after subtracting all variable costs with revenue. For a retail firm, it is the difference between the selling price of an item and the price the firm bought the item. In other words, the difference between what it sells and what it bought.

Gross profit itself does not give us a lot of information about the strength of a firm. Gross profit is frequently expressed in term of percentage. This is called gross profit margin (GPM). Gross profit margin varies among industries. Retailers normally have a slimmer gross profit margin than a software company.

Investors can use this tool to explain the competitive strength of a company. By analyzing gross profit margin trend, the health of a specific company can be determined. There are only three trends in gross profit margin. Gross profit margin can go up, down or stay the same.