Gross Margin
Gross margin is (revenue minus cost of revenue) divided by revenue: how much of each dollar of sales is left after direct costs. It reflects the profitability of the product itself and the company's pricing power.
How to read it
It varies enormously by industry: 70–85% for software, 50–75% for semiconductor design, 25–35% for retail. Comparisons only make sense within an industry.
The direction of gross margin matters more than its absolute level. Several consecutive quarters of improvement usually mean price increases are sticking, the product mix is getting better or economies of scale are kicking in.
Many companies include a gross margin range for the next quarter in their guidance, which is a direct read on how confident management is about pricing and costs.
Common pitfalls
- Banks, insurers and other financial companies have no cost of revenue in the traditional sense, so gross margin does not apply to them.
On FinDog
The revenue flow chart on each earnings analysis page shows at a glance how much of revenue went to costs. The Compare page plots two companies' gross margin trends on the same chart, and the Screener can filter by a minimum gross margin.
Open Compare →Related terms
- Operating MarginOperating margin is operating income divided by revenue. Operating income is what remains of gross profit after operating expenses such as R&D, sales and marketing, and general and administrative costs, so it reflects the overall profitability of the core business.
- Revenue Flow Chart (Sankey)A revenue flow chart uses bands of varying width to break down a quarter's revenue from left to right: on the left, revenue from each business segment; on the right, cost of revenue, R&D, SG&A, taxes and, finally, net income.