What is the gross margin?

Core points

• Gross margin represents the percentage of net sales retained by a company after paying all direct costs (also known as cost of sales) associated with the production of goods.

• Gross margin = (revenue from sales-cost of sales) / revenue from sales x 100%

• Both gross profit margin and net profit margin can be used to measure a company's profitability, in which gross profit margin only focuses on the relationship between revenue and direct cost of sales, but the net profit margin takes into account all the expenses of the company.

Detailed explanation of concept

Gross margin is the percentage of gross margin to sales revenue (or operating income), where gross margin is the difference between revenue and the cost of sales corresponding to revenue, expressed by a formula:

Gross margin = gross margin / sales revenue x 100% = (sales revenue-cost of sales) / sales revenue x 100%

Gross margin represents the ratio of net sales retained by a company after paying all direct costs (also known as cost of sales) associated with the production of goods. The higher the gross margin, the more sales the company retains, which is a measure of a company's profitability. Companies use gross profit margin to measure the relationship between their production costs and revenue. If a company's gross profit margin falls, it may consider cutting labour costs, raising product prices or purchasing materials from suppliers that demand lower prices.

Gross margin and net profit margin

Both gross profit margin and net profit margin measure the profitability of a company compared to its income over a period of time. Among them, the gross profit margin only focuses on the relationship between revenue and the cost of sales, but the net profit margin takes into account all the expenses of the enterprise. Net profit margin excludes interest, taxes and operating expenses from net sales, so it is a more conservative figure.

Therefore, the gross profit margin helps the company to assess its profitability related to production and operating activities, while the net profit margin helps the company to assess its overall profitability.

The case of gross margin

The following is the profit statement of Apple Inc's annual report for the fiscal year ended September 25, 2021:

The annual report shows that:

Apple Inc's sales income in fiscal year 2021 was 365.817 billion US dollars.

Apple Inc's cost of sales in fiscal year 2021 was $212.981 billion.

It can be concluded that