The investor’s field guide · G
Gross margin
Gross profit expressed as a percentage of revenue, after deducting the costs classified as directly associated with sales.
Explained by the editorial team
Gross margin shows how much revenue remains after the costs included in cost of sales. It helps explain the economics of delivering a product or service before overheads and other expenses. Comparisons require consistent classification of direct costs.
A worked example
A company records £200,000 revenue and £120,000 cost of sales. Gross profit is £80,000 and gross margin is 40%. That £80,000 still has to cover relevant overheads, financing costs and tax; it is not the owner’s take-home amount.
What to examine
Check whether labour, subcontractors, freight and support costs are included consistently. A margin improvement may reflect price increases or better operations, but it could also result from moving costs into overheads. Compare products, customers and periods rather than relying only on the company average. In a service business, utilisation and staff costs may make the definition particularly important. Read the calculation alongside net profit and cash flow before drawing conclusions about business quality.
General information, not investment, legal or tax advice. Examples are illustrative. Read the disclaimer.