Gross margin

Gross margin

Gross margin is an important metric for investors, as it can give them insight into a company’s overall financial health. A company with a high gross margin is likely doing well and generating a lot of profit from its sales. On the other hand, a company with a low gross margin may struggle to generate profit and be in financial trouble. 


What is gross margin? 

Gross margin is the difference between a company’s revenue and the cost of its goods sold. It’s a key metric for evaluating a company’s financial health, indicating how much profit it can generate from its sales. 

A high gross margin indicates that a company efficiently turns sales into a profit. In contrast, a low gross margin means a company is struggling to profit from its sales. 

Understanding gross margin 

Understanding and keeping an eye on gross margins may also assist business owners in avoiding pricing issues, losing revenue on sales, and eventually, going out of business. Making sense of abnormalities in your income statements gets difficult if you don’t understand your gross margin. 

Many firms doing well sometimes fail because their costs are excessively high or their pricing is too low, making it impossible for them to make a profit. Establishing a common pricing strategy is alluring, especially when facing fierce competition. Still, it is rarely durable, and it can be challenging to raise rates later, even with a strong client base. You may prevent price errors before it’s too late by using gross margin estimates and other considerations as you develop your business. 

Another challenge for small business owners is cost control. Staff can easily neglect cost control processes, which can quickly reduce their profit margins. You have a problem, for instance, if more expensive materials have entered your production process. 

You can find these issues before it’s too late by being aware of your gross margin on each product throughout your business and responding to any deviations you see. 

Formvula of gross margin 

The formula for gross margin is: 


                            (Net sales – the cost of goods sold COGS) 

Gross margin = ———————————————————  x 100 

                                               net sales 

How to calculate gross margin? 

Calculating the gross margin is simple if you’ve been in the company long enough to have some experience with record keeping. However, for new businesses, the procedure is a little more difficult. 

Look at historical data for a business quarter or year, and determine your company’s total revenue for this period and the expenses of products sold to begin calculating the gross margin for an existing company (raw materials and labour). 

There are a different ways to calculate gross margin, but the most common is to take the company’s gross profit (revenue minus the cost of goods sold) and divide it by income. This will give you a percentage that you can use to compare different companies. 

(Revenue – Cost of Goods Sold) / Revenue = Gross Margin (%) 

If you’re calculating a startup’s gross margin and don’t have any revenue reports to use as a guide, you’ll need to study your prospective gross margins. Think about the following: 

What is the competitor doing? To determine where your gross margins should be, look up the averages for your industry or the gross margins of your rivals. Even though their financial information is private, their price and your knowledge of expenses can help you make an educated guess about your margins. 

Analyse your expenses and look at ways to reduce them over time. This should provide you with an early idea of your company’s profitability. Remember that gross margins shift over time when costs decrease, and efficiency is gained. 

Example of gross margin 

Let us look at the following example. A year or so has passed since Lexi’s small business began operating. Lexi wants to understand more clearly how costs impact her business’ bottom line. She then opens her accounting programme and begins to perform some calculations. 

She has made a total of US$500,000 from sales for the entire year. 

She has a US$435,000 cost of goods sold. The costs of producing the items she sold, including raw materials, labour, and production overhead, are included in the price of goods sold.  

She carried out the following computation to determine gross profit in dollars: 

US$500,000 – US$435,000 = US$65,000 

In other words, Lexi made a gross profit of US$65,000, and her gross margin was 13%. 

Frequently Asked Questions

Gross margin is the entire proportion of gross income derived from business sales, whereas net margin measures how much of a company’s revenue is used to produce net income. As it excludes selling and administrative costs, the gross margin has a wider range than the net margin. 

Generally, a profit margin of about 10% is healthy, whereas 20% would be regarded as excessive, and 5% would be considered poor. This would vary depending on the industry

As gross margin comprises fixed overhead expenditures, contribution margin will meet or exceed gross margin. The contribution margin would likely be constantly lower than the gross margin since it does not include fixed costs. 

The money that remains after a corporation deducts its expenditures from its sales is known as gross profit. On the other hand, gross margin, or the amount of profit made per dollar of sales, is calculated by dividing a company’s gross profit by its sales. Gross margin is a percentage whereas gross profit is defined as a figure. 

Generally, a higher gross margin is better than a lower one, as it indicates that a company is more efficient at generating profits from its sales. However, it’s important to remember that gross margin can vary depending on the industry, so comparing apples to oranges is not always a good idea. 

When looking at a company’s financial statements, you can usually find the gross margin in the “Income Statement” or “Profit & Loss Statement.” 

Related Terms

    Read the Latest Market Journal

    Weekly Updates 26/2/24 – 1/3/24

    Published on Feb 28, 2024 38 

    This weekly update is designed to help you stay informed and relate economic and company...

    All-in-One Guide to Investing in China via ETFs

    Published on Feb 27, 2024 172 

    Start trading on POEMS! Open a free account here! Why China? In the vast landscape...

    Navigating the Post-Inflation Landscape in 2024: Top 10 US Markets Key Events to Look out for

    Published on Feb 23, 2024 209 

    Start trading on POEMS! Open a free account here! In 2023, the United States experienced...

    From Boom to Bust: Lessons from the Barings Bank Collapse

    Published on Feb 23, 2024 60 

    Barings Bank was one of the oldest merchant banks in England with a long history...

    Decoding FX CFD 2.0

    Published on Feb 20, 2024 65 

    This article is aimed at availing information and knowledge essential to intermediate forex traders. It...

    Weekly Updates 19/2/24 – 23/2/24

    Published on Feb 19, 2024 89 

    This weekly update is designed to help you stay informed and relate economic and company...

    Unlock Prosperity with 5 Sure-Fire Financial Instruments!

    Published on Feb 14, 2024 197 

    In Singapore, the concept of guaranteed returns may evoke the spirit of prosperity, reminiscent perhaps...

    Weekly Updates 12/2/24 –16/2/24

    Published on Feb 13, 2024 70 

    This weekly update is designed to help you stay informed and relate economic and company...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you


    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  


    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066