Gross Margin
How much is left from every $100 of sales after paying the direct cost of producing what was sold. It reflects pricing power and production cost, and it is the first line of defense on the income statement.
How to calculate it
Gross margin = (revenue − cost of revenue) ÷ revenueGross profit = revenue − cost of revenue (often labeled cost of goods sold or cost of sales)How to read it
- A high gross margin that holds steady for years usually means a differentiated product, customers willing to pay more, or a cost advantage.
- The trend matters more than the level. A steady decline often means price competition, input costs that cannot be passed on, or a worse product mix.
- Read it with segment disclosures: a change in the overall margin may simply reflect a shift between high-margin and low-margin businesses.
Common pitfalls
- A high gross margin does not guarantee profits. Sales, marketing, R&D and administrative costs can eat it all; follow through to operating and net margin.
- Companies classify costs differently. Shipping, depreciation, stock-based compensation and customer support may sit in cost of revenue at one company and in operating expenses at another.
- Some companies, especially in services and financials, do not present a gross profit line at all. Do not force the calculation where the income statement has no cost-of-revenue line.
- A gross margin far above peers that does not square with growth in receivables or inventory is a classic forensic-accounting question.
Industry differences
Software and branded drugs can exceed 70%; retailers, distributors and contractors often run in the single digits to the teens. Banks and insurers have no gross margin. Compare only with peers or with the company's own past.
Where to find it in a 10-K
Income statement in the 10-K or 10-Q. Revenue and cost of revenue are usually the first two lines. MD&A often explains margin changes, and segment notes may give margins by business.
U.S. vs. China reporting
A-share income statements follow a standard template with an operating cost line, so gross margin is easy to compare across companies. U.S. filers choose their own line items under Regulation S-X, which makes cross-company comparisons noisier. Check what is included in cost of revenue before comparing.