Definition
Gross margin isolates the profitability of core production by excluding operating expenses, interest, and taxes. It directly reflects pricing power and production efficiency. Companies with high gross margins (60%+) often possess strong brands, intellectual property, or network effects that protect against competition.
functions Formula
Gross Margin = (Revenue − COGS) / Revenue × 100%
lightbulb Example
Revenue is $80M and COGS is $30M. Gross margin = ($80M-$30M)/$80M = 62.5%. This high margin suggests the company has strong pricing power or low production costs.
verified_user Key Points
- Reflects pricing power and production efficiency
- Software/SaaS companies typically have 70-90% gross margins
- Declining gross margins may signal competitive pressure
- Excludes SGA, R&D, and other operating expenses