Gross Margin

Gross margin is a financial metric that measures the percentage of a company’s revenue that exceeds its cost of goods sold (COGS). It reflects how efficiently a company is producing and selling its products by indicating the proportion of revenue left after covering direct production costs. Gross margin is calculated by dividing gross profit by total revenue and is expressed as a percentage. Higher gross margins indicate better efficiency and pricing power.

Example

A company with $1 million in sales and $600,000 in COGS has a gross profit of $400,000, resulting in a gross margin of 40%, indicating that 40% of sales revenue exceeds production costs.