Gross Margin
The share of gross profit left after the direct cost of making the product (cost of goods sold) — the top-stage profitability among the profit tiers.
In plain terms
A bakery sells bread for $1.00, and the ingredients like flour and butter cost $0.40, so each loaf leaves $0.60 — 60% of sales. That 60% is the gross margin.
What is subtracted here is only "the cost directly spent to make the product (cost of goods sold)." Advertising, admin, and rent are not yet taken out. So gross margin sits at the very top of the profit tiers — "first-stage profitability with only cost of goods removed."
What it tells you
Gross margin is the first to reveal "how much the company can add on top of cost" — that is, its power to set the product's price (pricing power). The stronger the brand or the fewer the substitutes, the higher it runs.
Operating profit and net income come from subtracting selling, admin, and tax costs one after another from here. So gross margin is the starting point of every margin, and if it is low, there is a limit to how much cost-cutting at the lower stages can do.
Formula
gross margin = gross profit ÷ revenue × 100 gross profit = revenue − cost of goods sold (COGS)
What high or low means
A higher gross margin means the power to sell dearly relative to cost. Software, where the cost to copy once made is near zero, routinely runs in the 80s percent, while retail and manufacturing that resell goods typically run single digits to the 30s.
A rising trend can be read as a sign of raised prices or lower costs; a falling one as rising raw-material prices or losing out to price competition.
Normal levels differ completely by industry, so you cannot rank companies on gross margin alone. A thin-margin, high-volume business (a supermarket) and a thick-margin, low-volume business (luxury) simply earn in different ways.
Companies differ in what they count as "cost of goods sold." A company that puts logistics and depreciation into COGS versus one that puts them into selling/admin will show different gross margins, so even within the same industry a 1:1 comparison needs caution.
Even with a good gross margin, heavy selling and admin costs below it can sharply lower operating margin. Do not look only at the number one stage up — look at operating margin too to see whether the trade really pays.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see Gross and other financial metrics alongside the sector average.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.