Gross Margin
Measures the percentage of revenue left after direct costs of producing goods or services.
Formula
Gross Margin = (Revenue - Cost of Revenue) / Revenue x 100%
Worked example$10 billion of revenue minus $6 billion of direct costs leaves $4 billion, producing a 40% gross margin.
Calculation steps
- Subtract $6 billion of cost of revenue from $10 billion of revenue.
- The result is $4 billion of gross profit.
- Divide $4 billion by $10 billion and multiply by 100 to get 40%.
How to interpret it
Rising gross margin can indicate pricing power, better product mix, or production efficiency; falling margin can flag cost or pricing pressure.
Industry context
Software, retail, manufacturing, and banking economics are structurally different. Compare margins within a relevant peer group.
Common mistakes
- Confirm how the company classifies costs.
- Do not confuse gross margin with gross profit.
- Check whether acquisitions or product mix changed the comparison.