Vareto Finance Glossary

Gross Margin


Gross Margin is the portion of revenue remaining after taking off the cost of goods sold (COGS) for the period. Since it only considers direct costs, gross margin tells a company how much profit it has remaining to cover its fixed costs and non-operating expenses.


For example, a company makes $10 million in revenue and its cost of goods sold is $3 million. Thus, its gross profit will be $7 million.Gross profit margin = (Revenue - COGS)/Revenue= (7 / 10 ) *100 = 70%. This means the company has earned $0.70 in gross profit for every $1 of revenue.

Why it matters

Gross margin is a key financial metric that shows a company's efficiency in sales-to-profit conversion. It tells how efficiently a company can control its production costs. Investors and stakeholders may compare the company's gross margin against its competitors and across multiple reporting periods to gauge its efficiency improvement.