Glossary
Gross margin
Gross profit divided by revenue: the share of each sales dollar left after paying the direct costs of what was sold.
Gross margin is gross profit expressed as a percentage of revenue. It shows how much of each dollar of sales remains after paying the direct cost of producing or buying what was sold, before overhead, research, marketing, interest and tax. A high or rising gross margin usually points to pricing power or efficient production; a falling one can be an early warning of competition or cost pressure.
How it works
Reading it in context
Gross margins differ enormously across industries, so compare a company with its own history and close peers:
- Software and online platforms often report gross margins of 70% or more, because the cost of serving an extra customer is low.
- Grocers, distributors and contract manufacturers typically run far lower gross margins and rely on volume and speed.
- Business mix matters: a company shifting toward services or subscriptions can lift its overall margin even if no single product changes.
Cautions
What goes into COGS is partly a company's choice. Some put shipping, depreciation of production equipment or stock compensation for support staff in COGS; others report them as operating expenses. Check the notes before comparing two companies' margins, and follow the margin cascade down to operating and net margin to see where the money finally goes.