Glossary
Gross Margin
The share of each dollar of revenue left after paying the direct cost of producing what was sold.
Gross margin sits at the top of the profit story. Take revenue, subtract only what it directly cost to make or deliver the product, and express what remains as a percentage. A 60 percent gross margin means sixty cents of every revenue dollar survived that first subtraction.
It comes before everything else a company spends money on: research, marketing, salaries outside production, interest, and tax. So a high gross margin is not profit, it is room. What a company does with that room is a separate question answered further down the income statement.
The figure is heavily determined by what kind of business it is. Software costs very little to deliver one more copy of, so software gross margins are structurally high. A grocer buying and reselling physical goods operates on thin ones by the nature of the trade. Comparing the two tells you which industry you are looking at rather than which company is run better.
See it on a real company
MSFT shows this figure on its pageWe label it "Gross Margin", and Wall Street calls it "Gross Margin". The page is open to everyone, no account needed.
Related terms
- Profit MarginThe percentage of revenue that survives as profit once costs are taken out, at whichever stage is being measured.
- RevenueAll the money a company brought in from selling its products and services, before any costs are subtracted.
- Net IncomeWhat is left of revenue after every expense, interest payment, and tax has been subtracted: the bottom line.
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