How is 'gross margin' defined?

Gross margin is defined as the difference between sales revenue and the cost of goods sold, expressed as a percentage. This metric provides insight into how efficiently a company is producing its goods relative to its sales. By calculating gross margin, a business can determine the amount of sales revenue that exceeds the cost of the products sold, allowing it to assess profitability at a fundamental level.

This calculation is crucial because it reflects the effectiveness of management in controlling production costs, thus playing a key role in financial analysis and planning. A higher gross margin percentage indicates better efficiency and profitability from core business operations, making it a vital indicator for both internal management and external stakeholders like investors and creditors. Understanding gross margin helps companies make more informed decisions regarding pricing, cost control, and investment in operations.