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Gross profit margin

Gross margin is the profit left after deducting cost of sales from sales, expressed as a percentage of sales, and shows per-unit profitability. Gross margin measures how much profit remains after the direct cost of goods produced or sold (raw materials, labour, energy).
Contents
  1. 1.Key points
  2. 2.Formula / calculation
  3. 3.Interpretation
  4. 4.Pitfalls
  5. 5.Frequently asked questions

Key points

  • It is the purest indicator of pricing power and cost structure.
  • A rising gross margin shows price increases outpacing costs, while a falling margin shows competitive or input-cost pressure.
  • companies classify costs differently.

Formula / calculation

Gross margin = (Sales − Cost of sales) / Sales × 100. It is computed quarterly and annualised and varies widely across sectors (70%+ in software, 20–30% in retail).

Interpretation

A rising gross margin shows price increases outpacing costs, while a falling margin shows competitive or input-cost pressure. Comparing margins among peers in the same sector reveals competitive strength.

Pitfalls

companies classify costs differently. Inventory valuation methods and FX effects swing the margin. Gross margin excludes operating expenses, so it does not show overall profitability alone.

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Frequently asked questions

Gross margin is the profit left after deducting cost of sales from sales, expressed as a percentage of sales, and shows per-unit profitability.

Gross margin = (Sales − Cost of sales) / Sales × 100. It is computed quarterly and annualised and varies widely across sectors (70%+ in software, 20–30% in retail).

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