| gross margin See gross profit margin. |
Gross margin. Gross margin is the percentage by which profits exceed production costs. To find gross margin you divide sales minus production costs by sales.
For example, if you want to calculate your gross margin on selling handmade scarves, you need to know how much you spent creating the scarves, and what you collected by selling them.
If you sold 10 scarves at $15 a piece, and spent $8 per scarf to make them, your gross margin would be 46.7%, or $150 in sales minus $80 in production costs divided by $150. Gross margin is not the same as gross profit, which is simply sales minus costs. In this example, it's $70, or $150 minus $80.
If you're doing research on a company you're considering as an investment, you can look at the gross margin to help you see how efficiently it uses its resources.
If the company has a higher gross margin than its competition, it can command higher prices or spend less on production. That might mean it can allocate more resources to developing new products or pursuing other projects.
What Does Gross Margin Mean?
A company's total sales revenue minus its cost of goods sold (COGS), divided by the total sales revenue, expressed as a percentage. The gross margin represents the percentage of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services it sells. The higher the percentage is, the more the company retains on each dollar of sales to service its other costs and obligations. It is calculated as follows:
Investopedia explains Gross Margin
This number represents the proportion of each dollar of revenue that the company retains as gross profit. For example, if a company's gross margin for the most recent quarter was 35%, it would retain $0.35 from each dollar of revenue generated. This money could be used to pay off selling, general, and administrative expenses; interest expenses; and distributions to shareholders. The levels of gross margin can vary drastically from one industry to another. For example, a software company generally has a higher gross margin than does a manufacturing firm.
Related Terms:
• Gross Profit Margin
• Net Income—NI
• Operating Leverage
• Profit Margin
• Return on Sales—ROS
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