Gross Margin

AAA

DEFINITION of 'Gross Margin'

A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations.

Gross Margin

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, to be put towards paying 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 depending on the business. For example, software companies will generally have a much higher gross margin than a manufacturing firm.

For more, check out A Look At Corporate Profit Margins

VIDEO

Loading the player...
RELATED TERMS
  1. Gross Expense Ratio - GER

    The total percentage of a mutual fund's assets that are devoted ...
  2. Adjusted Gross Margin

    A calculation used to determine the profitability of a product, ...
  3. Berry Ratio

    The ratio of a company's gross profits to operating expenses. ...
  4. Return On Sales - ROS

    A ratio widely used to evaluate a company's operational efficiency. ...
  5. Net Income - NI

    1. A company's total earnings (or profit). Net income is calculated ...
  6. Profit Margin

    A ratio of profitability calculated as net income divided by ...
RELATED FAQS
  1. When does a business report gross margins?

    Gross margin is a percentage calculated by subtracting a company's cost of goods sold (COGS) from its revenue and dividing ... Read Full Answer >>
  2. Does gross profit include depreciation or amortization?

    Gross profit (sometimes called "gross margin") represents a company's sales revenue minus its cost of goods sold – in other ... Read Full Answer >>
  3. How does a company determine the right level of sales volume?

    A company determines the right level of sales volume by conducting a cost-volume-profit analysis. This helps a company figure ... Read Full Answer >>
  4. What are the disadvantages of the FIFO accounting method?

    The first-in, first-out (FIFO) accounting method has two key disadvantages. It tends to overstate gross margin, particularly ... Read Full Answer >>
  5. When is accrual accounting more useful than cash accounting?

    The accrual accounting method is more useful than the cash accounting method when a person or company is trying to understand ... Read Full Answer >>
  6. What sorts of factors decrease cash flow from operating activities?

    The operations section of the cash flow statement reconciles net income and cash flows by adding back noncash expenses and ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    Ratio Analysis Tutorial

    If you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios.
  2. Investing Basics

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  3. Fundamental Analysis

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  4. Investing Basics

    Finding Your Margin Investment Sweet Spot

    Borrowing to increase profits isn't for the faint of heart, but margin trading can mean big returns.
  5. Fundamental Analysis

    Analyzing Retail Stocks

    To analyze retail stocks, investors need to be aware of the most common metrics used. Find out what they are.
  6. Fundamental Analysis

    Analyzing Operating Margins

    Find out how to put this important component of equity analysis to work for you.
  7. Entrepreneurship

    Run Your Finances Like A Business

    Think of yourself as your own little company. To make it run smoothly, you need to take a look at your books.
  8. Investing

    Take Control With Investing Absolutes

    Uncover the three things most good stocks have in common: performance, profitability and value.
  9. Markets

    Introduction To Fundamental Analysis

    Learn this easy-to-understand technique of analyzing a company's financial statements and reports.
  10. Stock Analysis

    2 Areas Where Stratasys Can Improve

    Stratasys has suffered missteps, including struggling to meet or exceed Wall Street expectations, and dealing with compressing gross profit margins.

You May Also Like

Hot Definitions
  1. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  2. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  3. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  4. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  5. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  6. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
Trading Center