Profitability · updated October 21, 2026
What is gross margin and how is it calculated
Gross margin shows how many dollars are left from every $100 of sales after paying for what the product directly cost: materials, production, goods bought for resale. From this money the company then pays office salaries, advertising, research and interest.
Gross margin formula
- Sales
- Revenue over the last 12 months.
- Cost of sales
- The direct costs of the products or services sold.
Worked example
A shop sells goods for $100 that it bought for $70.
$30 is left, and it has to cover rent, salaries and everything else.
How to read gross margin
A high and stable gross margin shows the company can set its prices without losing customers. A falling margin points to pressure from competitors or costs.
When gross margin can fool you
Comparing across sectors: a supermarket with a 25% margin can be an excellent business, and a software maker with 60% a weak one.
Related terms
Learn it in the Academy
Questions about gross margin
Why does the trend matter more than the level?
Because the level is set by the sector, but a margin that falls year after year shows the company is losing power over its customers or suppliers.
These explanations are for information only. They are not a recommendation to buy or sell.
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