Definition of Gross Margin

Gross margin is a measure to assess the profitability of a business and it is calculated by dividing the gross profit by total sales revenue. It is expressed as the percentage of the sale revenue.

The gross margin is calculated using the following formula:

Example of Gross Margin:

A cycle store owner, who purchases cycles for $1500 and then resell them for $2700 against cash. At this point the gross profit will be as follows:

Gross Profit = $2700 - $1500 = $1200

A higher gross margin shows that the business has low direct cost as compared to sales and is a good sign. On the other hand, a lower gross margin means that there is a lesser amount for a business to cover other indirect costs and remain profitable.