Gross Margin
The percentage of revenue remaining after subtracting the direct cost of producing goods or services.
Gross margin measures how efficiently a company produces its goods or delivers its services. It is calculated as (Revenue - Cost of Goods Sold) / Revenue, expressed as a percentage. A software company might have 80% gross margins because the marginal cost of serving another customer is near zero, while a manufacturer might operate at 30% because raw materials and labor are expensive. Gross margin is one of the most important structural indicators of a business model. It tells you how much money the company has left over to pay for sales, marketing, R&D, and administration after covering production costs. Expanding gross margins usually signal pricing power, improved efficiency, or a shift toward higher-value products. Declining gross margins can indicate rising input costs, competitive pricing pressure, or a shift toward lower-margin products. For operators tracking S&P 500 earnings, gross margin trends reveal whether companies are gaining or losing pricing power in their markets. If major companies in your space are seeing gross margin compression, that often means the market is becoming more competitive and pricing pressure will eventually reach smaller players too. Quarter-over-quarter gross margin changes of more than 100 basis points warrant attention.
Related Terms
Operating Margin
The percentage of revenue remaining after subtracting all operating expenses, showing profitability from core business operations.
Revenue
Total income generated from sales of goods or services before any expenses are deducted, also called the "top line."
Net Income
Total profit after all expenses, taxes, and costs have been subtracted from revenue, also called the "bottom line."
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization, a proxy for operating cash flow that strips out non-cash charges and capital structure effects.
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Frequently Asked Questions
What does gross margin mean?
The percentage of revenue remaining after subtracting the direct cost of producing goods or services.
Why does gross margin matter for earnings analysis?
Gross margin measures how efficiently a company produces its goods or delivers its services. It is calculated as (Revenue - Cost of Goods Sold) / Revenue, expressed as a percentage. A software company might have 80% gross margins because the marginal cost of serving another customer is near zero, wh...