Gross Margin

Gross margin, also referred to as gross profit margin, is the amount by which gross profits exceed production costs. It is usually expressed as a percentage, and indicates the profitability of a business before overhead costs.

Gross Margin

Gross margin, also referred to as gross profit margin, is the amount by which gross profits exceed production costs. It is usually expressed as a percentage, and indicates the profitability of a business before overhead costs.

 

Gross Margin Formula

Gross margin is calculated as gross profit divided by total revenue.  Both figures can be found on the income statement.



Gross profit margin formula:  Gross profit / Revenue

Gross Margin Application

Gross margin is a good indication of how profitable a company is at the most fundamental level - how efficiently a company uses its resources, materials, and labor during the production process. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations;  and the better the company is thought to control costs.  Investors use the gross profit margin to compare companies to determine what are the most profitable.



Related Terms