## 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.

Next Up

## 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.

RELATED TERMS
1. ### Gross Income

Gross income is the total income from all sources before deductions ...
2. ### Margin

Margin is borrowed money that is used to purchase securities. ...
3. ### Marginal Revenue (MR)

Marginal revenue is the added revenue from the sale of one more ...
4. ### Operating Margin

Operating margin is a measure of a company's profitability, and ...
5. ### Marginal Profit

Marginal profit is the profit earned by a firm or individual ...
6. ### Net Loss

A net loss occurs when expenses exceed income or total revenue ...
Related Articles

### 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

### Gross, Operating and Net Profit Margins

A company’s income statement includes the company’s gross, operating and net profits.
3. Managing Wealth

### What’s a Good Profit Margin for a New Business?

Surprisingly, the younger your company is, the better its numbers may look.
4. Investing

### Profitability Indicator Ratios

Learn about profit margin analysis, effective tax rate, return on assets, return on equity and return on capital employed.

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

### FireEye's 3 Key Financial Ratios (FEYE)

Learn about FireEye, Inc.'s financial ratios, such as gross margin, operating margin and quick ratio, that are helpful to understand the company's business.
7. Investing

### 6 Stocks to Outperform The Late Bull Market

Stocks with high and stable gross profit margins will outperform, says Goldman Sachs.
RELATED FAQS
1. ### What costs are not counted in gross profit margin?

Gross profit margin is the percentage of revenue that exceeds the cost of goods sold for a company. However, not all expenses ... Read Answer >>
2. ### What's the difference between gross profit margin and net profit margin?

Gross profit margin and net profit margin are two separate profitability ratios used to assess a company's financial stability ... Read Answer >>
3. ### Gross Margin vs Operating Margin: What the difference?

Understand the difference between gross margin and operating margin in relation to evaluating a company's overall profitability ... Read Answer >>
4. ### How do gross profit margin and operating profit margin differ?

Gross profit margin and operating profit margin both measure profitability for a company, but they have distinct differences ... Read Answer >>
5. ### How do gross margin and contribution margin differ?

Gross margin and the contribution margin are metrics used to measure profitability, but each uses a different method. Read Answer >>