Summary
Gross Margin measures the percentage of revenue remaining after deducting the direct costs of producing goods or delivering services. It shows how much profit is left before operating expenses, finance costs, and taxes.
Gross Margin is a key measure of basic business efficiency.
Why it matters
Gross Margin helps investors understand how well a company manages production costs and pricing. Strong gross margins may indicate pricing power, cost control, or a competitive advantage.
Lower gross margins may suggest rising input costs, pricing pressure, or a less profitable business model.
How it is calculated
Gross Margin = Gross Profit ÷ Revenue × 100
Where:
Gross Profit = Revenue − Cost of Goods Sold
How to read it
A higher Gross Margin generally means the company keeps more profit from each unit of revenue after direct costs. A lower Gross Margin means direct costs consume a larger portion of sales.
Gross Margin is most useful when compared with similar companies or the same company over time.
When it may not be available
Gross Margin may not be shown for certain financial companies where the concept of cost of goods sold is not applicable in the same way as for non-financial businesses.