What is Gross Margin?
Gross margin (gross profit margin) is the percentage of net revenue left after subtracting cost of goods sold (COGS).
It shows how efficiently a company turns sales into gross profit before operating expenses, and is a core signal of pricing power, cost discipline, and scalability in the value-creation chain.
Investors, lenders, and management track gross margin to compare profitability across products, business models, and competitors, and to assess whether there is enough spread to fund operating expenses, growth capex, and debt service.
Formula
In percentage terms, gross margin is:
Where:
- Revenue (Net Sales) = sales after returns, discounts, and allowances
- COGS = direct costs tied to producing or delivering goods/services (materials, direct labor, manufacturing or service delivery costs)
Gross profit in currency terms is:
Example
A company reports:
- Revenue (Net Sales): $100,000
- Cost of Goods Sold (COGS): $60,000
Step 1 – Compute gross profit:
$100,000 − $60,000 = $40,000 gross profit.
Step 2 – Compute gross margin:
Gross Margin = $40,000 ÷ $100,000 × 100% = 40%.
A 40% gross margin means the company retains $0.40 of gross profit for every $1 of revenue to cover operating expenses, contribute to EBITDA and operating margin, and ultimately support ROIC and equity value creation.