Gross margin

Profitability

The share of revenue left after the direct cost of producing what was sold.

Formula

Gross margin = gross profit ÷ revenue

Why it matters

Gross margin is the rawest read on pricing power. A company that keeps 60 cents of every revenue dollar before overhead has room to fund R&D, marketing, and mistakes; a company keeping 15 cents has almost none. Stable or rising gross margin over many years is one of the most reliable signs of a durable competitive position, because competitors attack fat margins first.

What good looks like

Software and branded consumer companies often run 60–90%. Quality industrials and consumer staples sit around 30–50%. Retailers, distributors, and commodity producers can be healthy at 15–30%. The level matters less than the trend within the industry: a gross margin falling several points over a few years suggests eroding pricing power — our margin-compression red flag triggers on a drop of more than 5 points over three years.

Caveats

Gross margin is not comparable across industries; a 25% grocery margin can support a better business than a 70% margin at a subscale software firm. Some companies classify costs differently (for example, putting delivery or depreciation in cost of revenue versus operating expense), which shifts gross margin without changing economics. Banks and insurers do not report a meaningful gross margin at all.