Gross margin: a key measure of profitability

July 30, 2024
Glossary entry

The gross margin, also known as the gross margin, is a business management indicator that describes the difference between sales and the direct costs of goods or services sold. It indicates how much of turnover is left over after deducting the costs of manufacturing or purchasing products to cover the remaining operating costs and profits.

Calculation: Gross Margin(%)= [(Turnover-Cost of goods sold) / turnover] ×100

 

The gross margin is an important measure of a company's profitability. A high gross margin indicates that the company is efficient in production or procurement and can utilise a greater proportion of sales to cover operating costs and generate profits. Conversely, a low gross margin may indicate high production costs or lower selling prices, which can affect profitability.