Revenue minus the direct cost of producing the goods or services sold leaves gross margin. It is usually expressed as a percentage of revenue. A gross margin of 40 percent means that for every dollar of sales, forty cents remain after covering the cost of goods sold; the rest must cover operating expenses, interest, taxes, and profit.

Gross margin is a key indicator of pricing power and production efficiency. High margins suggest that customers value the product enough to pay well above its direct cost, or that the company produces efficiently. Low margins may signal intense competition, high input costs, or operational problems. Trends in gross margin over time often reveal changes in the underlying economics of the business.

Analysts compare gross margins across companies in the same industry and against a firm’s own history. Managers use the metric to evaluate product lines, pricing decisions, and cost-control efforts. Because it sits near the top of the income statement, gross margin is one of the first numbers examined when assessing financial health.