Gross Margin
A reported accounting margin whose meaning depends on revenue recognition and what the company classifies as cost of goods sold.
Gross margin is commonly calculated as revenue minus cost of goods sold, divided by revenue. It describes reported gross profit relative to revenue under a selected accounting classification; it does not by itself measure cash generation, pricing power, operating efficiency, or investment quality.
Frequently Asked Questions
What costs belong in gross margin?
That depends on the company and accounting framework. Product, fulfillment, hosting, labor, depreciation, freight, and support costs may be classified differently. Comparisons require consistent cost definitions and revenue recognition.
What happens when revenue is zero or negative?
The percentage is undefined when revenue is zero and can be misleading when reported revenue is negative. The gross profit amount and underlying accounting treatment should be reviewed instead of interpreting the ratio mechanically.
Is a higher gross margin always better?
There is no universal percentage. A higher margin can reflect pricing power or mix, but also capitalization choices, outsourcing, acquisition accounting, underinvestment, or exclusion of economically important costs. Volume, retention, operating expenses, cash flow, and risk still matter.
Can gross margins be compared across industries?
Only with care. Business models and cost classifications differ materially. Comparisons are usually most useful among close peers using consistent periods and definitions.