Loading the player...

What is 'Gross Margin'

Gross margin is a company's total sales revenue minus its cost of goods sold (COGS), divided by 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 it sells. The higher the percentage, the more the company retains on each dollar of sales, to service its other costs and debt obligations.

Gross Margin

BREAKING DOWN 'Gross Margin'

The gross margin number represents the portion 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 is 35%, that means it retains $0.35 from each dollar of revenue generated. It spends the remainder on COGS. As COGS have already been taken into account, the remaining funds can be put toward paying off debts, general and administrative expenses, interest expenses and distributions to shareholders.

How to Calculate Gross Margin

To illustrate how to calculate gross margin, imagine a business collects $200,000 in sales revenue. It spends $20,000 on manufacturing supplies and $80,000 on labor costs. After subtracting its COGS, it has $100,000 in gross profits. Dividing gross profits by revenue equals 0.5, and when multiplied by 100, that becomes 50%.

Importance of Gross Margin

Companies use gross margin to measure how their production costs relate to their revenues. For example, if a company's gross margin is falling, it may look for processes that allow it to cut labor costs or for suppliers who offer lower costs on materials. Alternatively, it may decide to increase prices to boost revenue.

Businesses may also use gross margins to forecast how much money they have left over from sales to cover other operating expenses. For example, if a company has a 50% gross margin, it knows that it only has $0.50 of each revenue dollar collected to devote to operating expenses. Gross profit margins can also be used to measure company efficiency or to compare two companies of different sizes to each other.

Difference Between Gross Margin and Net Margin

While gross margin only looks at the relationship between revenue and COGS, net profit margin takes all of a business's expenses into account. When calculating net profit margins, businesses subtract their COGS as well as ancillary expenses, such as product distribution, wages for sales reps, miscellaneous operating expenses and tax. Gross margin, also called gross profit margin, helps a company assess the profitability of its manufacturing activities, while net profit margin helps the company assess its overall profitability.

For more information, check out A Look At Corporate Profit Margins.

RELATED TERMS
  1. Gross Profit Margin

    A financial metric used to assess a firm's financial health by ...
  2. Gross Income

    1. An individual's total personal income, before accounting for ...
  3. Margin

    1. Borrowed money that is used to purchase securities. This practice ...
  4. Profitability Ratios

    A class of financial metrics that are used to assess a business's ...
  5. Marginal Profit

    Marginal profit is the profit earned by a firm or individual ...
  6. Operating Margin

    Operating margin is a measure of a company's profitability, and ...
Related Articles
  1. Small Business

    How Gross Margin Can Make or Break Your Startup

    Find out how your startup's gross margin can impact your business, including why a mediocre margin may spell disaster for a budding business.
  2. Investing

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  3. Investing

    Gross, Operating and Net Profit Margins

    A company’s income statement includes the company’s gross, operating and net profits.
  4. Trading

    Margin Trading

    Find out what margin is, how margin calls work, the advantages of leverage and why using margin can be risky.
  5. Financial Advisor

    Margin Investing Gets A Bad Rap, But For The Thrill-Seeker, It's Worth It

    Investing on margin can be profitable but it's a risky play that needs care.
RELATED FAQS
  1. What is the difference between gross margin and gross profit?

    Understand the difference in definitions between gross margin and gross profit, and learn what each represents as a metric ... Read Answer >>
  2. What is the difference between gross margin and operating margin?

    Understand the difference between gross margin and operating margin in relation to evaluating a company's overall profitability ... Read Answer >>
  3. What is the difference between gross margin and profit margin?

    Understand the difference between gross margin and profit margin, and learn about the profitability ratios used in evaluating ... Read Answer >>
  4. What is the difference between gross margin and net margin?

    Learn the basics of gross profit margin and net profit margin, including how each is calculated and interpreted as a metric ... Read Answer >>
  5. What costs are not counted in gross profit margin?

    Explore the various measures of a company's profitability, such as gross, operating and net profit margins, and understand ... Read Answer >>
  6. What's the difference between profit margin and operating margin?

    Learn the differences between a company's gross profit margin, net profit margin and operating margin, and what each profitability ... Read Answer >>
Hot Definitions
  1. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  2. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  3. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  5. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  6. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
Trading Center