Gross margin, also known as gross profit margin, is used to determine how much revenue a company makes after the cost associated with producing the goods and services a company deals in is subtracted.
Gross margin is expressed as a percentage. It is mathematical expressed as a company’s total sales revenue minus its cost of goods sold, divided by the total sales revenue.
Finding out a company’s gross margin is important because it is an indicator of how much money is made compared to the amount of money spent. Investors are therefore very interested in knowing a company’s gross margin because the higher a company’s gross margin is, the more money it makes for the investor for each unit of money invested. While other indicators are also used to determine the return of investment, the gross margin is definitely one of the easiest indicators to compute and understand.
Another way gross margin can be useful is when computing the gross margin for each division of the company, or even for specific products. This is useful because the company will be able to determine which of its divisions and products are performing well, and which ones are incurring too much cost without a significant or acceptable return in revenue. By monitoring the gross margin of each, companies can make critical decisions such as killing of a product, investing more in another, or doing a study to find out how to increase revenue for a specific product or to lower the cost of production.