what gross margin can tell you
a company s gross margin is the percentage of revenue after cogs it s calculated by dividing a company s gross profit by its sales gross profit is a company s revenue less the cost of goods sold a company s gross margin is 35 if it retains 0 35 from each dollar of revenue generated 1cogs has already been taken into account so those remaining funds can consequently be channeled toward paying debts general and administrative expenses interest fees and dividend distributions to shareholders companies use gross margin to measure how their production costs relate to their revenues a company might strive to slash labor costs or source cheaper suppliers of materials if its gross margin is falling or it may decide to increase prices as a revenue increasing measure gross profit margins can also be used to measure company efficiency or compare two companies with different market capitalizations gross margin may also be referred to as gross profit margin the difference between gross margin and net margingross margin focuses solely on the relationship between revenue and cogs but net margin or net profit margin is a little different a company s net margin takes all a business s expenses into account it s the percentage of net income earned from revenues received 2businesses subtract their cogs as well as ancillary expenses when calculating net margin and related margins some of these expenses include product distribution sales representative wages miscellaneous operating expenses and taxes gross margin helps a company assess the profitability of its manufacturing activities net profit margin helps the company assess its overall profitability companies and investors can determine whether the operating costs and overhead are in check and whether enough profit is generated from sales the difference between gross margin and gross profitgross margin and gross profit are among the metrics that companies can use to measure their profitability both of these figures can be found on corporate financial statements and specifically on a company s income statement they re commonly used interchangeably but these two figures are different gross margin is a profitability measure that s expressed as a percentage gross profit is expressed as a dollar figure gross profit can be calculated by subtracting the cost of goods sold from a company s revenue it sheds light on how much money a company earns after factoring in production and sales costs 