<math>Gross\ Margin=Gross\ Profit/Revenue</math>
Gross Margin is expressed as a percent of revenue and is the amount of profit you have for each $1 in sales after deducting all costs directly related to the sale.
The actual dollar value for gross profit isn't really important -- for the analysts, that is. If you happen to be the company making the sales, then it's extremely important. But unless you happen to have a company hidden up your sleeve, you'll probably want to concentrate on the gross profit margin rather than the dollar amount. After all, $100 million in gross profit sounds impressive until you realize that the company made $5 billion dollars in sales. The gross margin in that case is a mere 2%, which is terrible! That company needs some new pricing and/or a new CFO.
The amount of gross margin tends to dictate how profitable the company will be by the time you get down to the net margin level (at the bottom of the income statement). The higher the gross margin, the more revenue dollars will "drop down" to the net income line. Generally.
Things that influence the gross margin are lowered sales prices (from competition) which means less revenue but the same costs or increased costs, such as higher energy prices. Companies cannot always quickly or successfully pass on their rising costs to the consumer, so they take a hit on the gross margin, which means they make less money.
Companies that can successfully control costs or pass them along readily to customers (such as from having a huge moat and the pricing power that comes with it), will have more stable or rising gross margins relative to competitors.
For the above reasons, analysts keep a pretty sharp eye on gross margin.
Such things as overhead (the cost for electricity, for instance) and selling or administrative costs (sometimes called "SARE") fall below the gross profit line and are part of operating costs, affecting operating margin.
- Cost of goods sold
- Gross profit
- Operating margin
- Net margin