Gross margin is a profitability measure that looks at a companys gross profit compared to its revenue or sales. It is the difference between revenue and cost of goods sold (COGS), divided by revenue, and is expressed as a percentage. Gross margin is calculated by subtracting the cost of goods sold from the companys revenue, which is known as the companys gross profit, and then dividing that figure by the total revenue and multiplying it by 100 to get the gross margin.

Gross margin is a key financial metric because it’s the first step in understanding the potential value of a company’s business model and how sustainable it will be. It is a window into the financial health of a company and measures production and business efficiencies. Gross margin can help with setting the selling price of a product and competitive analysis. Companies want high gross margins, as it means that they are retaining more capital per sales dollar.

Gross margin is a kind of profit margin, specifically a form of profit divided by net revenue. It is not necessarily profit as other expenses such as sales, administrative, and financial costs must be deducted. Gross margin can be expressed as a percentage or in total financial terms. If the latter, it can be reported on a per-unit basis or on a per-period basis for a business.

In summary, gross margin is a measure of a companys profitability that looks at its gross profit compared to its revenue or sales. It is calculated by subtracting the cost of goods sold from the companys revenue, dividing that figure by the total revenue, and multiplying it by 100 to get the gross margin. Companies want high gross margins, as it means that they are retaining more capital per sales dollar. Gross margin is a key financial metric that can help with setting the selling price of a product and competitive analysis.