Gross margin

Gross profit - revenue less the cost of goods sold - expressed as a percentage of revenue. It asks whether the thing being sold makes money.

Example

Northgate's gross profit of 1,680,000 on revenue of 4,200,000 is a gross margin of 40.0%, unchanged from Year 1.

Important

Only comparable between companies once you have read what each puts above the line. Comparing gross margins without that step compares accounting policies, not businesses.

Related terms

• Cost of goods sold — The direct cost of producing or delivering what was sold in the period - materials, the labour that makes the product, and whatever else the company places above the gross profit line.
• Operating margin — Operating profit as a percentage of revenue - what is left after the costs of running the business but before interest and tax. It asks whether the business around the product makes money.
• Income statement — A report of what a business earned and what it spent over a period of time, arranged in layers from revenue at the top down to net profit at the bottom.

Lessons that explain it

• The list price is a claim; the realised price is the evidence — Pricing diligence compares list prices with what customers actually pay, checks discounting patterns and looks for evidence that customers would accept higher prices. (10 min)
• Some companies can be funded without selling equity at all — Revenue-based financing, venture debt and grants provide capital without dilution, in exchange for repayment obligations or restrictions. They suit companies with predictable revenue more than pre-revenue ones. (11 min)
• The income statement: what it claims was earned — The income statement is a claim about performance over a period, assembled under rules that deliberately ignore when the cash moved. Read properly it is the most useful statement; read literally it is the most misleading. (12 min)
• SaaS lives on retention; marketplaces live on liquidity and take rate — Software businesses are judged on recurring revenue, expansion and margins. Marketplaces are judged on whether buyers and sellers reliably find each other, and how much of each transaction the platform keeps. (12 min)
• AI companies can have software growth with hardware-like costs; deep tech trades time for defensibility — AI businesses must be judged on the cost of running models and on what protects them from competitors using the same models. Deep tech companies face technical risk and long timelines before revenue, in exchange for harder-to-copy advantages. (12 min)
• In fintech, regulation, partners and losses matter as much as the product — Financial technology companies depend on licences or partner banks, earn thin margins on large volumes, and can face fraud and credit losses that do not appear until later. Evaluating them means looking beyond growth to compliance and loss rates. (11 min)

All 578 terms in the Investing glossary