Gross margin is a financial term that assesses the profitability of a business by calculating the percentage difference between revenue and cost of goods sold (COGS). It measures the effectiveness with which a corporation manages the expenses of manufacturing and selling its products or services.
Gross margin is calculated as: Gross Margin = (Revenue - COGS) / Revenue * 100
For instance, if a corporation had $100,000 in revenue and $60,000 in COGS, its gross margin would be 40% (40,000/100,000 * 100).
A high gross margin shows that a firm can create a substantial amount of revenue while keeping its expenses low, which is often regarded as an indication of a strong business. A low gross margin suggests that a firm is having trouble controlling its costs and may not produce enough income to pay them.