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Metric · Margin

Gross Margin Explained

Gross margin relates gross profit (revenue minus direct cost of goods sold) to revenue. It shows how much room a company has to fund sales, R&D and administration before any operating profit is even generated.

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Updated 20266 min read
Formula
Gross margin = Gross profit ÷ Revenue × 100
> 50%Strong margin
25–50%Moderate margin
< 25%Low margin
Guideline values, industry-dependent, illustrative

The formula in detail

The components of the formula at a glance.

Numerator
Gross profit
Revenue minus the cost of goods sold (materials, production).
Denominator
Revenue
Revenue from the core operating business.

Calculator

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Result gross margin
Moderate margin
45.0 %
1
A gross margin above 50% is typical for software or branded businesses with low variable costs.
2
A margin below 25% is often normal for retail or manufacturing and not a warning sign on its own.
3
Gross margin is the first step in the margin cascade: sales, R&D, admin and interest still have to be funded from it before net profit emerges.
4
A declining gross margin over several quarters can point to pricing pressure or rising input costs.

Used in these strategies

Magic Formula: Value + QualityGood companies at cheap prices: two factors, one score.Moat QualityCompanies with an economic moat: persistently high returns, defended margins.

Frequently asked questions

As a rough guide, above 50% counts as strong and below 25% as low. But the industry-typical range varies enormously between software, industrials and retail.
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Not investment advice. This explanation is for informational purposes only and does not constitute a recommendation to buy or sell securities.

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