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Gross Margin

 

Gross margin is profitability percentage that shows the ratio between gross income and revenue. Gross margin is usually calculated when there is a need to compare company’s competiveness and effectiveness ignoring the impact of capital structure and administration (overhead). 

 

Calculation


Gross margin = (Gross income / Revenue) * 100% = ((Revenue – Cost of sales) / Revenue) * 100%


* All financial data must be of the same period which normally should be 12 months, but the best period is last four reported financial quarters (12 months). It is also normal to calculate gross margin for one quarter but it requires more careful interpretation.


** Gross income from non-recurring activity can be eliminated depending on the purpose of calculation.  

 

Interpretation


This margin may tell a lot about company’s core activity’s effectiveness but only when it is compared correctly. Gross margin varies very strongly over industry groups and may be from 5% to 60% so it is very important to compare gross margin with gross margins of similar companies that belong to the same industry niche. Gross margin also can be compared to gross margin of previous periods of the same company. Gross margin normally is higher and more stable than net income margin or operating margin, but not as informative as EBITDA margin.

 

Gross profitability is calculated only for non-financial companies while for financial companies other financial ratios are used. Some companies in their financial statements use gross margin to represent gross income.

 

 






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