Gross Margin is a ratio representing the revenue earned by a company after excluding the cost of goods sold (COGS). This is also used as a metric to measure a company's production efficiency. It is sometimes used interchangeably with Gross Profit.

The Formula:

Gross Margin formula


COGS is Cost of Goods Sold
Net sales are Revenue excluding returns, allowances, and discounts.

Fluctuations in the gross margin indicate that there are inconsistencies in the management or product quality. It also fluctuates when the company makes significant operational changes or adjusts the prices of the products.

A higher gross margin implies a greater efficiency of the company to turn raw materials into products. Buying raw materials at a cheaper price and selling goods at higher prices will increase a company's gross margin. However, going overboard can affect the number of customers buying the product.