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Gross Margin

Gross margin is the percentage of a company's revenue that remains after subtracting the direct costs of producing the goods or services it sells, showing how much each sales dollar contributes.

What Is Gross Margin?

Gross margin is a profitability measure that shows how much of a company's revenue is left over after paying for the direct costs of making what it sells. These direct costs are usually called the cost of goods sold (COGS) for a product business, or the cost of revenue for a service business. Gross margin is expressed as a percentage, so it can be compared across companies and across time periods of different sizes.

Gross margin is reported near the top of the income statement, before operating expenses such as marketing, research, and administrative overhead are subtracted. Because of this placement, it isolates how efficiently a company produces its core offering.

How Is Gross Margin Calculated?

The basic formula is:

Gross Margin (%) = (Revenue - Cost of Goods Sold) / Revenue x 100

For example, if a company reports $500,000 in revenue and $300,000 in cost of goods sold, its gross profit is $200,000. Its gross margin is $200,000 divided by $500,000, or 40 percent. This means that for every dollar of sales, the company keeps 40 cents to cover its other expenses and, eventually, to generate profit.

Costs included in COGS vary by industry. A manufacturer may include raw materials, factory labor, and production overhead, while a software company may include hosting costs and customer support. Differences in what each company counts as a direct cost can make comparisons between businesses less straightforward.

Why Gross Margin Matters to Investors

Investors often look at gross margin to understand the economics of a business. A higher gross margin means the company has more room to pay for operating expenses and still earn a profit. A stable or rising gross margin can suggest pricing power or improving production efficiency, while a falling one may point to rising input costs, price competition, or changing product mix.

Gross margin differs widely across industries. Software and certain pharmaceutical businesses often report high gross margins, while grocery retailers and airlines typically report much lower ones. For this reason, gross margin is most useful when compared with companies in the same industry or with the same company's past results.

Gross margin has limits. It does not account for overhead, debt costs, or taxes, so it does not show overall profitability on its own. Investors usually examine it alongside operating margin, net profit margin, and other measures to form a fuller picture.

Updated October 15, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Revenue

Revenue is the total money a company earns from its core business activities, such as selling goods or services, before any expenses are subtracted.

Income Statement

An income statement is a financial report that summarizes a company's revenues, expenses, and resulting profit or loss over a specific period, such as a quarter or year.

Operating Margin

Operating margin is the percentage of a company's revenue left after paying for its operating costs, such as wages, materials and depreciation, but before interest and taxes.

Net Profit Margin

A profitability ratio showing the percentage of a company's total revenue that remains as net income after all expenses, taxes, and interest are deducted.

Cost of Goods Sold (COGS)

Cost of goods sold is the total direct cost a company incurs to produce or purchase the goods it sold during a period, such as materials, labor, and manufacturing overhead.

Gross Profit

Gross profit is the amount of revenue a company keeps after subtracting the direct costs of producing the goods or services it sells, before operating expenses, interest, and taxes are deducted.

Profit Margin

Profit margin is a percentage showing how much of a company's revenue remains as profit after certain costs are subtracted, indicating how efficiently the business turns sales into earnings.