HOMEPAGE

Gross Margin

Definition

Gross margin measures the percentage of revenue that remains after subtracting the cost of goods sold (COGS). It reflects how efficiently a company produces or sources its products.

$$\text{Gross Margin}=\frac{\text{Revenue}-\text{COGS}}{\text{Revenue}}$$

Why It Matters

• Shows how much profit a company generates from its core products before operating expenses.
• Indicates pricing power, production efficiency, and cost control.
• A strong gross margin gives a company more flexibility to invest in marketing, R&D, and growth.
• A declining margin may signal rising input costs, supply chain issues, or competitive pressure.

How to Interpret It

• Higher Gross Margin: Strong product profitability and efficient production.
• Lower Gross Margin: Higher costs, weaker pricing power, or operational inefficiencies.
• Industry Context: Retail and manufacturing often have lower margins; software and digital products typically have higher ones.

Example

A company reports:

• Revenue: $1,000,000
• COGS: $600,000

$$\text{Gross Margin}=\frac{1,000,000-600,000}{1,000,000}=0.40=40\mathrm{\%}$$

A gross margin of 40% means the company keeps forty cents of gross profit for every dollar of revenue.