Reading the accounts
Gross margin
What proportion of revenue is left after the direct cost of producing what was sold.
How it works
Gross margin measures the fundamental economics of the product itself, before any overheads. Software businesses run at 70–90%; supermarkets at low double digits.
It sets the ceiling on everything below it. A business with a 20% gross margin has very little room to fund research, marketing and profit out of the same revenue.
Where it misleads people
What sits inside cost of goods sold varies between companies and industries. Comparing gross margins across sectors, or between companies that classify costs differently, produces false conclusions.
Formula
Gross margin = (revenue − cost of goods sold) ÷ revenue × 100Related terms
- Operating marginOperating income as a percentage of revenue — how much of each sale survives running the business.
- Net marginNet income as a percentage of revenue — what proportion of each sale ends up as profit.
- RevenueThe total value of goods and services a company sold in a period, before any costs.
- Cost of goods soldThe direct costs of producing the goods or services a company sold.
Mentioned in
More in Reading the accounts
- Goodwill
- Intangible assets
- Going concern
- Interest coverage
- GAAP and IFRS
- Free cash flow
- Liabilities
- Fixed costs
All 51 Reading the accounts terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.