Gross Margin Definition - Investopedia

Gross margin equates to net sales minus the cost of goods sold. · The gross margin shows the amount of profit made before deducting selling, general, and ... TableofContents Expand TableofContents WhatIsGrossMargin? TheFormulaforGrossMarginIs WhatDoestheGrossMarginTellYou? TheDifferenceBetweenGrossMarginandNetMargin Howdowecalculategrossmargin? Whatisthedifferencebetweengrossprofitandgrossmargin? Whatisagoodgrossmargin? CorporateFinance FinancialRatios WhatIsGrossMargin? Grossmarginisnetsaleslessthecostofgoodssold(COGS).Inotherwords,it'stheamountofmoneyacompanyretainsafterincurringthedirectcostsassociatedwithproducingthegoodsitsellsandtheservicesitprovides.Thehigherthegrossmargin,themorecapitalacompanyretains,whichitcanthenusetopayothercostsorsatisfydebtobligations.Thenetsalesfigureisgrossrevenue,lessthereturns,allowances,anddiscounts. KeyTakeaways Grossmarginequatestonetsalesminusthecostofgoodssold.Thegrossmarginshowstheamountofprofitmadebeforedeductingselling,general,andadministrative(SG&A)costs.Grossmargincanalsobecalledgrossprofitmargin,whichisgrossprofitdividedbynetsales. 1:53 TheGrossMargin TheFormulaforGrossMarginIs Gross Margin = Net Sales − COGS where: Net Sales = Equivalent to revenue, or the total amount of money generated from sales for the period. It can also be called net sales because it can include discounts and deductions from returned merchandise. Revenue is typically called the top line because it sits on top of the income statement. Costs are subtracted from revenue to calculate net income or the bottom line. COGS = Cost of goods sold. The direct costs associated with producing goods. Includes both direct labor costs, and any costs of materials used in producing or manufacturing a company’s products. \begin{aligned}&\text{GrossMargin}=\text{NetSales}-\text{COGS}\\&\textbf{where:}\\&\text{NetSales}=\text{Equivalenttorevenue,orthetotalamount}\\&\text{ofmoneygeneratedfromsalesfortheperiod.Itcanalso}\\&\text{becallednetsalesbecauseitcanincludediscounts}\\&\text{anddeductionsfromreturnedmerchandise.}\\&\text{Revenueistypicallycalledthetoplinebecauseitsits}\\&\text{ontopoftheincomestatement.Costsaresubtracted}\\&\text{fromrevenuetocalculatenetincomeorthebottomline.}\\&\text{COGS}=\text{Costofgoodssold.Thedirectcosts}\\&\text{associatedwithproducinggoods.Includesbothdirect}\\&\text{laborcosts,andanycostsofmaterialsusedinproducing}\\&\text{ormanufacturingacompany'sproducts.}\\\end{aligned} ​Gross Margin=Net Sales−COGSwhere:Net Sales=Equivalent to revenue, or the total amountof money generated from sales for the period. It can alsobe called net sales because it can include discountsand deductions from returned merchandise.Revenue is typically called the top line because it sitson top of the income statement. Costs are subtractedfrom revenue to calculate net income or the bottom line.COGS=Cost of goods sold. The direct costsassociated with producing goods. Includes both directlabor costs, and any costs of materials used in producingor manufacturing a company’s products.​ Toillustrateanexampleofagrossmargincalculation,imaginethatabusinesscollects$200,000insalesrevenue.Letusassumethatthecostofgoodsconsistsofthe$100,000itspendsonmanufacturingsupplies.Therefore,aftersubtractingitsCOGS fromsales,thegrossmarginis$100,000.Thegrossprofitmarginis50%,or($200,000-$100,000)/$200,000. WhatDoesthe GrossMargin TellYou? Thegrossmargin(alsoreferredtoasgrossprofit)representseachdollarofrevenuethatthecompanyretainsaftersubtractingCOGS. However,grossmarginmayalsobereferredtoasgrossprofitmargin.Forexample,ifacompany'srecentquarterlygrossprofitmarginis35%,thatmeansitretains$0.35fromeachdollarofrevenuegenerated. BecauseCOGShavealreadybeentakenintoaccount,thoseremainingfundsmayconsequentlybechanneledtowardpayingdebts,generalandadministrativeexpenses,interestfees,anddividenddistributionstoshareholders. Companiesusegrossmargin,grossprofit,andgrossprofitmargintomeasurehowtheirproductioncostsrelatetotheirrevenues.Forexample,ifacompany'sgrossmarginisfalling,itmaystrivetoslashlaborcostsorsourcecheapersuppliersofmaterials. Alternatively,itmaydecidetoincreaseprices,asarevenue-increasingmeasure.Grossprofitmarginscanalsobeusedtomeasurecompanyefficiencyortocomparetwocompaniesofdifferentmarketcapitalizations. Anyonestrugglingtocalculategrossmargin,mayfinditeasiertoutilizesomeofthebestaccountingsoftwarecurrentlyavailableinstead. TheDifferenceBetweenGrossMarginandNetMargin WhilegrossmarginfocusessolelyontherelationshipbetweenrevenueandCOGS,thenetprofitmargintakesallofabusiness'sexpensesintoaccount.Whencalculatingnetprofitandrelatedmargins,businessessubtracttheirCOGS,aswellasancillaryexpensessuchasproductdistribution,salesrepwages,miscellaneousoperatingexpenses,andtaxes. Grossmarginhelpsacompanyassesstheprofitabilityofitsmanufacturingactivities,whilenetprofitmarginhelpsthecompanyassessitsoverallprofitability. Howdowecalculategrossmargin? Grossmarginisrevenueminusthecostofgoodssold(COGS).Grossmarginissometimesusedtorefertogrossprofitmargin,whichisrevenueminuscostofgoodssold(orgrossprofit)dividedbyrevenue. Whatisthedifferencebetweengrossprofitandgrossmargin? Grossprofitisrevenuelessthecostsof goods sold.Grossprofitandgrossmarginaresometimesusedinterchangeably.Meanwhile,grossmarginandgrossprofitmarginarealsousedinterchangeably,Grossprofitmargintakesthegrossprofit(revenuelesscostofgoodssold)anddividesitbyrevenue. Whatisagoodgrossmargin? Thegrossmarginvariesbyindustry,however,service-basedindustriestendtohavehighergrossmarginsandgrossprofitmarginsastheydon'thavelargeamountsofCOGS.Ontheotherhand,thegrossmarginformanufacturingcompanieswillbelowerastheyhavelargerCOGS. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. AccountingTools."GrossMarginDefinition." AccountingTools."TheDifferenceBetweenGrossMarginandNetMargin." RelatedTerms WhatIsMyGrossIncome? Grossincomerepresentsthetotalincomefromallsources,includingreturns,discounts,andallowances,beforedeductinganyexpensesortaxes. more WhatIsCostofGoodsSold(COGS)? Costofgoodssold(COGS)isdefinedasthedirectcostsattributabletotheproductionofthegoodssoldinacompany. more WhatIsNetProfitMargin? Expressedasapercentage,thenetprofitmarginshowshowmuchofeachdollarcollectedbyacompanyasrevenuetranslatesintoprofit. more NetSales Netsalesaretheresultofgrosssalesminusreturns,allowances,anddiscounts.Theyareafactoringrossprofitbutdonotincludecostsofgoodssold. more EarningsBeforeInterestandTaxes(EBIT):DefinitionandFormula Earningsbeforeinterestandtaxes(EBIT)isanindicatorofacompany'sprofitabilityandiscalculatedasrevenueminusexpenses,excludingtaxesandinterest. more UnderstandingRevenue Revenueistheincomegeneratedfromnormalbusinessoperations.Revenuecanalsobeearnedbygovernmentsandnonprofits. more PartnerLinks RelatedArticles Tools HowDoGrossProfitandGrossMarginDiffer? FinancialStatements OperatingIncomevs.GrossProfit FinancialStatements GrossProfitvs.NetIncome:What'stheDifference? FinancialRatios Howdoesgrossmarginandnetmargindiffer? Accounting Doesgrossprofitincludelaborandoverhead? CorporateFinance HowFixedandVariableCostsAffectGrossProfit