profitability
Tracked on R40
GM Gross Margin
The percentage of revenue remaining after subtracting the direct cost of goods sold (COGS). Shows how much profit a company makes on its core product before overhead.
Formula
Gross Margin = ((Revenue − COGS) / Revenue) × 100
How to Interpret
Software companies typically have 70-90% gross margins (low marginal cost per user). Hardware companies 30-50%. Retail 20-40%. Higher margins mean more room for R&D, sales, and profit.
Why It Matters
Gross margin is the ceiling for profitability. A company with 30% gross margin can never have 40% operating margin. It reveals the fundamental economics of the business model — software scales better than hardware because of this.
Example
If a company records $100M in revenue and $35M in direct costs, $65M remains after COGS. Its gross margin is 65% (($100M − $35M) ÷ $100M × 100).