Gross Margin

Profitability Metric Investment Wiki — Fundamentals
Gross Margin represents the proportion of each dollar of revenue that the company retains as gross profit after accounting for the direct costs associated with producing the goods and services it sells (Cost of Goods Sold or COGS).
Quick Reference
Type Profitability Metric
Formula (Total Revenue - Cost of Goods Sold) ÷ Total Revenue
High Quality > 40% (Industry dependent)
Primary Use Assessing manufacturing efficiency and product pricing power

1.0 The Formula

Basic Form

formulaGross Margin = (Revenue - COGS) / Revenue

If a company sells a widget for $100, and it cost $60 in materials and factory labor to build that widget, the gross profit is $40. The Gross Margin is 40%. Gross Margin completely ignores marketing, head office salaries, and taxes.

2.0 Interpretation & Edge Cases

Software companies generally have Gross Margins near 80% because reproducing a digital download costs virtually nothing. Grocery stores have Gross Margins near 25% because buying apples from a farm to resell is inherently expensive.

3.0 Related Pages

Operating Margin

The next level down the income statement. Starts with Gross Profit and removes operating expenses.

Net Profit Margin

The final bottom-line margin after all taxes and interest are paid.