Definition
Gross Margin
Gross margin is revenue minus the cost of goods sold, expressed as a percentage of revenue, showing the profitability of the core product before operating overheads.
Gross margin isolates how much a company earns after the direct costs of producing its goods or services, before selling, administrative and other operating expenses. A high and stable gross margin signals pricing power or low input costs.
For manufacturers, gross margin swings with raw-material prices; for services and software firms it tends to be high. Tracking gross margin trends helps analysts separate input-cost pressures from operating-efficiency issues, which show up further down at the operating and net margin lines.
Related terms
- EBITDAEBITDA is earnings before interest, tax, depreciation, and amortisation, a measure of a company's core operating profitability.
- Operating MarginOperating margin is the percentage of revenue left as operating profit after deducting the costs of running the core business.
- Net MarginNet margin, or net profit margin, is profit after tax as a percentage of revenue, showing how much of each rupee of sales becomes bottom-line profit.
- Cost of Goods Sold (COGS)Cost of Goods Sold is the direct cost of producing the goods or services a company sells, including raw materials, direct labour and manufacturing overheads.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.