Gross margin, sometimes called gross profit, is the percentage by which profits exceed production costs. To find gross margin you divide sales minus production costs by sales.
For example, if you want to calculate your gross margin on selling handmade scarves, you need to know how much you spent creating the scarves, and what you collected by selling them.
If you sold 10 scarves at $15 a piece, and spent $8 per scarf to make them, your gross margin would be 46.7%, or $150 in sales minus $80 in production costs divided by $150.
Gross margin is not the same as gross profit, which is simply sales minus costs. In this example, it's $70, or $150 minus $80.
If you're doing research on a company you're considering as an investment, you can look at the gross margin to help you see how efficiently it uses its resources.
If the company has a higher gross margin than its competition, it can command higher prices or spends less on production. That might mean it can allocate more resources to developing new products or pursuing other projects.
Yahoo Finance - Cite This Source - This Definition
- Free cash flow, Income statement, Net margin, Profit margin, Return on equity
All > Business > Finance > Personal Finance