Fundamentals of Business Intelligence (FBI) Practice Exam

What does a higher gross profit margin indicate?

1. Worse company performance

2. No impact on business

3. Better company performance

4. Higher costs of goods sold

The correct answer is: Better company performance

A higher gross profit margin is an indicator of better company performance. This metric reflects the percentage of revenue that exceeds the cost of goods sold (COGS). In practical terms, when a company has a higher gross profit margin, it suggests that the company retains a larger portion of revenue as profit after accounting for the direct costs associated with producing its products or services. Higher gross profit margins typically mean that a business is either able to sell its products or services at a higher price point relative to what it costs to produce them, or it has lower production costs that allow for greater profit retention. This can be indicative of strong pricing power, effective cost management, or both. Thus, a higher gross profit margin is generally viewed positively by investors and analysts, as it suggests improved profitability and operational efficiency.