What it is
Gross margin is a key profitability ratio calculated by dividing gross profit by total revenue. Gross profit is a company's revenue minus its cost of goods sold (COGS), which includes the direct costs involved in producing goods or services. A higher gross margin indicates that a company is more efficient at converting revenue into profit after accounting for direct production costs.
This metric is closely watched during earnings reports, as it reflects a company's pricing power and production efficiency. A rising gross margin suggests a company is either increasing prices, reducing production costs, or both, which is generally positive for investor sentiment. Conversely, a declining gross margin can signal increased competition, rising input costs, or a need to cut prices, often leading to investor concerns.
Why it matters
Gross margin helps you understand a company's core profitability from its products or services. It reveals efficiency and pricing power.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice