Glossary
Gross margin
The share of each sale a company keeps after paying the direct cost of what it sold.
Gross margin is gross profit divided by revenue. Gross profit is revenue minus the cost of goods sold: materials and factory work for a maker, or the servers a software company pays to serve its customers.
A software company can keep 70% or more of each sale. A grocer or a car maker keeps much less. So compare a gross margin with companies in the same industry, or with the company's own past years.
A gross margin that falls year after year can mean costs that rise faster than the company can raise its prices. Banks and insurers report no cost of goods sold, so the figure does not apply to them.
Related terms
- Return on invested capital (ROIC): How much profit a company earns on the money invested in it by shareholders and lenders.
- Free cash flow: The cash a business produces from its operations after paying for the investment it needs to keep going.
- Fundamental analysis: Judging a company by its business (sales, profits, cash, debt) rather than by its share-price chart.