Gross Margin

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This article discusses Gross Margins. For other commonly used margins, see Profit margins

Gross Margin equals gross profit divided by revenue

Gross margin (also referred to as gross profit margin) represents the proportion of each dollar of revenue that the company banks as gross profit. Gross margin is calculated by subtracting Cost of Goods Sold (COGS) from Net Sales (yielding Gross Profit), which is then divided by Net Sales. That is,

Gross Margin = (Net Sales - Cost of Goods Sold) ÷ Net Sales.

or

Gross Margin = Gross Profit ÷ Net Sales.


Uses: Gross margins demonstrate company earnings, taking into consideration the costs of sales, or production of its goods and services. That is, it is the proportion of gross revenue that remains after the company pays the direct costs of producing those revenues. Within a given industry, Gross margins may also signify the competitive positioning - brand impact/loyalty, superior product offering and cost advantage.

Example: A company earns $100M in revenue during the accounting period and spends $75M in direct costs to produce those revenues (cost of goods sold). The company's gross margin for the accounting period would be 25%, and thus it would retain $0.25 from each dollar of revenue generated. This money would then be used to pay off other, indirect costs of their business such as administrative costs, research and development, or investment expenses.

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