Gross profit margin, usually shortened to gross margin, measures the percentage of revenue remaining after subtracting the direct cost of producing the goods or services sold. It is calculated by dividing trailing twelve-month gross profit by trailing twelve-month revenue. Gross margin reveals the fundamental profitability of a company's products or services before overhead, sales, research, and administrative expenses are considered.
A company with a 60% gross margin retains 60 cents of every revenue dollar after production costs. This is the first and most important margin in the income statement hierarchy because it defines the maximum profit potential from the core product before all other expenses eat into it.
Gross margins vary enormously by industry. Software companies routinely achieve 70-90% gross margins because digital products have near-zero marginal cost. Manufacturing companies typically range from 20-40%. Grocery and commodity businesses may operate with margins in the single digits.
Gross Profit Margin = Gross Profit (TTM) / Revenue (TTM) Where Gross Profit = Revenue − Cost of Goods Sold (if not reported directly)
GeminIQ divides TTM gross profit by TTM revenue, both from SEC filings. If gross profit is not reported directly (some companies report only revenue and total operating expenses), GeminIQ derives it by subtracting COGS from revenue using the as-filed values.
A: It depends entirely on the industry. Software and SaaS: 70-90%. Pharmaceuticals: 60-80%. Consumer brands: 40-60%. Manufacturing: 20-40%. Retail and grocery: 20-35%. The most useful comparison is against direct competitors and the company's own historical trend.
A: Gross margin changes reflect shifts in pricing power, input costs, product mix, or manufacturing efficiency. Expanding margins typically indicate pricing power or improving efficiency. Compressing margins may signal rising input costs, competitive pressure, or a shift toward lower-margin products.
A: The primary source of variation is how Cost of Goods Sold is classified. Some companies include depreciation in COGS; others report it separately below the gross profit line. Aggregators may reclassify these items during normalization. GeminIQ preserves the company's as-filed COGS figure.
A: A 30% gross margin means the company keeps $30 of every $100 in revenue after paying the direct cost of the goods or services it sold. That $30 is what remains to cover operating expenses, interest, and taxes, so a 30% gross margin leaves far less room than the 70% to 90% typical of software companies.
A: Divide the cost by one minus the target margin: a product costing $80 needs a price of $80 / (1 − 0.20) = $100 to earn a 20% gross margin. Adding 20% to cost instead gives $96, which is a 20% markup but only a 16.7% margin.
A: GAAP gross margin is gross profit divided by revenue using the revenue and cost of revenue a company reports under US GAAP. Some companies also publish a non-GAAP gross margin that excludes items such as stock-based compensation or amortization of acquired intangibles from cost of revenue, which makes it higher. GeminIQ calculates gross margin from the GAAP figures in the filing.
Further Reading: Gross Profit Margin: What It Reveals About Business Model Strength
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