Gross Margin

Gross margin (or gross profit margin) is a profitability metric that shows the money a business has made after the direct cost of operations, also known as cost of goods sold (COGS). Gross margin is shown as a percentage and compares the business’s gross profit to its revenue. This metric is one of the most telling indicators of a company’s overall financial health and standing. While similar, it is not to be confused with gross profit.

The gross margin formula is as follows:

Gross Margin = ((Revenue – Cost of Goods Sold) / Revenue) x 100

To better understand this measure in action, take a look at the following example. This business has $500,000 in revenue and $200,000 in COGS. Therefore, the calculation for gross margin would read as follows:

((500,000 – 200,000) / 500,000) x 100 = 60%

This means that for every $500,00 this business makes, it retains 60% of that revenue.