Gross margin

Gross profit divided by sales. It is usually expressed as a percentage.

Gross margin is one of several profit margin measures. It shows how much of a mark-up a company is achieving between the cost of what it sells and the selling price.

Because fixed costs have to paid out of gross profit, a change in gross margin usually causes a larger change in operating margin and an even larger change in pre-tax profit and EPS — in other words, the higher the gross profit, the higher the operational gearing.

Gross margin is also a measure of efficiency. If a company has a higher gross margin than its peers it must either have differentiated its products so as to get a higher price, or it must be more efficient and have lower costs.