Gross margin measures how much money a company holds onto from its sales after paying the direct costs of making its products or offering its services. To find it, you subtract COGS from total sales revenue, then divide by total sales revenue:
Gross margin = (Total sales revenue – COGS) / Total sales revenue
The result—a percentage—reflects how well a company is managing production and sales efficiency. A higher gross margin means more profit kept from each dollar of sales—a strong indicator of profitability.
Gross margin is crucial because it shows how effectively a company turns sales into profit after covering production costs. It can signal areas for improving efficiency or adjusting pricing to boost profitability. The higher the gross margin of a company, the more revenues can be reinvested into growth or used to cover other expenses.
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