Short definition: Gross margin is a financial metric that indicates the profitability of a company’s products or services after deducting the direct costs associated with producing or delivering them.
Explanation: It is expressed as a percentage and is calculated by subtracting the cost of goods sold (COGS) from revenue, then dividing the result by revenue. Gross margin provides insights into a company’s pricing power and efficiency in managing production costs.
Example: If a company sells a product for $100 and the COGS is $60, the gross profit is $40, and the gross margin is 40% ($40 / $100 = 0.40).
Additional information (optional): Gross margin can vary significantly across industries and companies. Factors that can influence gross margin include pricing strategies, competition, raw material costs, and production efficiency. A higher gross margin typically indicates a healthier and more profitable business.