What is a company’s Gross Margin?
Gross Margin represents the difference in how much a company sells its products for and how much it pays for the materials used to create those products.
Gross Margin = Revenue – Cost of Sales
Gross Margin is listed on a company’s income statement located within the company’s 10Q or 10K financial report.
Example below from Intel’s (INTC) 2012 2nd quarter earnings, which can be found here:
(click to enlarge)
A company’s Gross Margin can also be given as a percentage.
Using Intel’s numbers from above we can calculate Intel’s Gross Margins for the quarter:
So, Intel has a 64% Gross Margin. Meaning that for every $1 in sales of the company’s products, it costs Intel 36 cents to make that product and therefore has a operating profit of 64 cents.
The higher the Gross Margin, the better. A company with a higher margin means that the company is making more profit selling its products.
It is important to compare Gross Margins with competitors within a company’s same industry. Comparing Gross Margins of companies in different industries is not really useful, as different industries have significantly different margins. A company in the software industry will have much higher margins than a simple manufacturing company, but that does not necessarily mean the software company is a better investment opportunity.
It is also important to note that Gross Margins does not take into account many expenses that a company incurs. Gross Margins does not account for research and development, depreciation, amortization, interest on the company’s debt payments or taxes. A company may be wasteful in those aspects, where even if it had a great Gross Margin, it may still be a poor investment.
(A company’s “Net Margin” does include all other expenses)
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