# Price to Gross Profit Ratio Calculator

Written by:
PK

On this page is a price to gross profit ratio calculator or P/GP ratio calculator. Enter a company's price per share and annual gross profit per share, or total market cap and gross profit in one year to compute the company's PS ratio.

## What is the Price to Gross Profit Ratio?

The price to gross profit ratio compares the price you pay for shares of a company to a company's gross profit – the money left after subtracting the cost of goods sold, or COGS, from revenue. Most commonly, P/GP measures one year of gross profit.

While it's possible to construct a forward or future estimate of gross profits (in much the same way as a future price to sales), analysts commonly focus on forecasting sales and earnings. However, you can usually back out their margin estimates for a forward number. Additionally, many companies forecast gross profit margins, which let you add a company's gross profit estimate to your model.

### Strengths of Price to Gross Profit

Unlike the price to sales ratio, the price to gross profit ratio helps you compare the relative valuation across companies with similar business models yet different input costs. For example, a Software as a Sales (SAAS) model where a company sells pure software should have better gross margins than one which requires physical assets or infrastructure. However, once you factor in gross margin and compute the price to gross profit ratio, you can better see relative differences in valuation.

In early-stage investing, the unit economics of an idea must be positive to be even worth funding a company – there are no earnings, so earnings yields and price to earnings ratios are useless. David Sacks of Craft Ventures pointed out that adding physical infrastructure and assets to software models necessitates thinking about gross profits above sales (perhaps uncomfortable for some mature tech investors!). This is equivalent to the thought experiment of a company selling $1 bills for$.95 cents... while they'd have no issue generating revenue, there is no way to make that business profitable in the future without changing the product.

Additionally, although numbers are scarce in early-stage investing, often you can compute a price to sales or price to gross profit multiple. Although growth trumps multiples for early-stage investing, the further down the income statement you can go, the better for understanding the economics of a business.

### Limitations on Price to Gross Profit

While price to gross profit improves on price to sales in many scenarios, gross profit and gross margins are the first place where the income statement introduces ambiguity. COGS, or cost of goods sold, should include costs that scale with the number of "things" sold. However, simple decisions such as how to hand out free samples or trials (attached to a product, or distributed separately?) can be the difference between costs landing in COGS or Sales & Marketing expenses further down the statement.

In general, as team roles change or marketing and sales decisions move costs between entries on the income statement, gross profit won't be as stable as revenue (and it's even less stable between companies). So while gross profit ratios are often superior to pure revenue valuation measures, the comparison of price to gross profit ratios likely takes fine adjustment.

Additionally, the price to gross profit ratio relies on market capitalization in the numerator – missing any debt (and cash) held by the company. Enterprise value adds debt in the company's capitalization structure, and nets out the cash, so for a complete picture it's necessary to at least be aware of the company's balance sheet. EV/Gross Profit is a similar ratio which uses EV instead of market cap.

## Price to Gross Profit Formula

The price to gross profit ratio formula is:

price\ to\ gross\ profit\ ratio=\frac{price\ per\ share}{gross\ profit}

Where:

• Price - the current trading price of a share of a company.
• Gross Profit - the revenue per share of a company over 12 months.

## Valuation Ratios and Yields

### PK

PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK lives in New Hampshire with his wife, kids, and dog.

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