I am reviewing financial projects from a technology start up. They show the gross profit margin as high as 118%. In some years it is less than 100%. Is there any circumstance that gross profit margin would exceed 100%?
There are really no circumstances that I can think of where gross margin should exceed 100% if an organization is properly recording transactions according to GAAP. Theoretically, an organization might book contra-expenses against cost of revenues accounts that exceed the total cost of revenues resulting in negative cost of revenues and a gross margin in excess of 100% during a certain period. However, it is almost certain that such an organization is improperly accounting for these contra-expenses as they should more likely be an offset to a prepaid expense and have a net zero effect on the income statement or be reflected as income if they are not directly tied to expenses incurred.
You are probably mistaking an Return on Investment (ROI) calculation with a Gross Profit Margin calculation. To calculate gross profit margin do the following:
- Subtract Cost of Goods Sold (COGS) from Total Revenue
- Divide the result by Total Revenue.
Based on that approach, gross profit margin cannot be greater than 100%.