Financial metrics glossary

Gross margin: definition, formula and example

Gross margin is the share of revenue a company keeps after paying the direct costs of what it sold. It is gross profit (revenue minus cost of goods sold) divided by revenue, and it shows how much of each dollar of sales is left to cover operating expenses and profit.

Updated October 15, 2026

Formula

Gross profit = Revenue − Cost of goods sold
Gross margin = Gross profit ÷ Revenue × 100%

Worked example

Sample

SAMPLE · Northbridge Analytics, September 2026

Northbridge Analytics is the fictional software company in the Financial Analyst's public sample. Its books for September 2026:

Line	September 2026
Revenue	$163,156
Cost of goods sold (direct costs)	$44,002

Gross profit = $163,156 − $44,002 = $119,154
Gross margin = $119,154 ÷ $163,156 × 100% = 73.0%

Gross margin: 73.0%

The prior month's gross margin, from the same books: 70.1%.

How to read it

Gross margin is a percentage; gross profit is the dollar amount behind it. A company can grow gross profit while its margin falls, when sales grow but direct costs grow faster.
What counts as a direct cost depends on the business: materials and production labour for a manufacturer, the purchase cost of goods for a distributor, hosting and delivery staff for a software company. Compare margins only across periods or companies that classify costs the same way.
A margin that falls while revenue rises means direct costs grew faster than sales. The cause — discounts, higher input prices or a shift toward lower-margin products — is found in the revenue and cost lines that moved.
Gross margin says nothing about overheads. A business with a healthy gross margin can still lose money if its operating expenses exceed its gross profit.

How small US public companies compare (FY2025 10-Ks)

Median: 41.4%
Middle half: 21.9% to 59.9%
Companies: 539

All industries, from Ataski's study of the fiscal 2025 annual reports (Form 10-K) that non-accelerated filers with revenue of $1 million to $250 million filed with the SEC: half the companies are above the median and half below, and the middle half fall within the range shown. These are small public companies, not private businesses, so read the figures as a reference point rather than a target.

Gross margin by industry, with the method →

Source: Ataski analysis of SEC Financial Statement Data Sets (FY2025 10-K filings).

Where it shows up in the monthly management report

Gross profit is on the report's cover and in its P&L summary, where it is set against the plan.

The “Monthly economics” page walks from revenue through direct costs to gross profit and breaks revenue and expenses into their lines, so a change in margin can be traced to the line that caused it.

Open the sample workspace — a fictional company's books, worked by the Financial Analyst, with its monthly report. No signup.
The Financial Analyst — what it reads from your accounting system, what the report contains and what it costs.

Gross profit
Revenue minus the direct costs of what was sold, in dollars.
Contribution margin
Revenue minus variable costs: what each sale adds toward fixed costs.
Operating margin
Operating profit as a share of revenue, before interest and tax.
Budget vs actual
Each P&L line compared with its plan, in dollars and per cent.

Frequently asked questions

What is a good gross margin?

Median 41.4% (middle half 21.9–59.9%), 539 companies, FY2025 10-Ks: the gross margin of small US public companies, with revenue of $1 million to $250 million and outside finance, insurance and real estate. What is good depends on the industry and on what the business counts as direct costs, so compare it with your own prior months, your plan and companies with the same business model.

Source: Ataski analysis of SEC Financial Statement Data Sets (FY2025 10-K filings)

What is the difference between gross margin and net margin?

Gross margin subtracts only the direct costs of what was sold. Net margin subtracts every expense — operating expenses, interest and tax — and shows the share of revenue that remains as profit.

Is gross margin the same as markup?

No. Margin divides gross profit by revenue; markup divides it by cost. A product bought for $60 and sold for $100 has a 40% gross margin and a 66.7% markup.

Can gross margin be negative?

Yes. When direct costs exceed revenue, gross profit and gross margin are negative: each sale loses money before any operating expense is paid.