What is gross margin and how is it interpreted in a company?
Updated June 27, 2026 · DeepTicker
Gross margin measures what percentage of every euro of sales the company keeps after paying the direct cost of making the product or delivering the service (raw materials, production labor, the purchase of merchandise). It's calculated as gross profit / sales and expressed as a %. A high gross margin (for example, 70-80% in software) indicates that the product sells for well above what it costs to produce; a low one (10-20% in distribution) is normal in high-volume businesses.
What Gross margin is and why it matters
Gross margin is the first line of a company's profitability and answers a very specific question: out of every euro coming in from sales, how much is left once you've paid what it costs directly to produce what you sell? That direct cost is called the cost of sales or cost of goods sold (COGS) and includes raw materials, factory labor, production energy and, in a trading company, the price at which it bought the merchandise it later resells. What's left after subtracting it is the gross profit, and expressed as a percentage of sales it's the gross margin.
It matters because it's the ceiling of all subsequent profitability. Out of that gross margin the company still has to pay the sales structure, marketing, administration, R&D, the interest on its debt and taxes. If the gross margin is narrow, there isn't much cushion to draw on: any cost increase or unexpected expense eats into the profit. If it's wide, the company has room to maneuver to invest in growth, weather a crisis or fend off a competitor without falling into losses. That's why a high and stable gross margin is usually a symptom of a good business.
Gross margin is also one of the best indicators of pricing power, which is one of the most reliable signs of a moat or competitive advantage. A company that can charge far more than it costs to produce, and maintain it over time, is showing that its customers value its brand, its technology or its service enough to pay a premium. When a company has to cut prices to sell, its gross margin collapses, which betrays that it competes on price in an undifferentiated market.
The figure only makes sense compared with its sector, because the cost structure varies enormously from one industry to another. Software has very high gross margins (often 70-85%) because, once the program is developed, each additional copy costs almost nothing. Distribution and supermarkets work with gross margins of 15-25%, but make up for it with enormous volume and turnover. Heavy industry or automotive usually move in the 15-30% range. That's why a gross margin of 30% can be excellent in one sector and mediocre in another: never judge it in a vacuum.
Just as important as the level is the trend. A gross margin that rises year after year indicates the company is gaining efficiency, raising prices or selling higher-value products; one that falls warns of growing competition, cost inflation not passed on to the customer or loss of brand power. A sustained fall in gross margin is one of the first signs that the moat is eroding, and usually anticipates problems long before they show up in the bottom line. It's wise to look at the multi-year series, not an isolated quarter.
Gross margin relates to the rest of the profitability cascade. Below it sits the operating margin (after also subtracting the costs of the activity: sales, administration, R&D) and the net margin (after subtracting interest and taxes). Comparing the three tells you where the money stays: a company with a high gross margin but a low operating margin is spending a lot on structure or on acquiring customers; one with a low gross margin but a decent operating one is very cost-efficient. Reading the full cascade is more informative than looking at a single margin.
In DeepTicker you don't have to dig through the income statement or do the divisions by hand: the gross margin and its evolution are part of the quality signals that feed the DeepScore, the 0-100 score based on the analysis of quality and competitive advantage (moat). The Profitability dimension of the DeepScore values high and stable margins compared with the sector, not in the abstract, because a benchmark by sector is the only fair one (a 30% doesn't mean the same in software as in a supermarket). And since every figure comes explained with its context, the more companies you analyze, the better you interpret which margin is good in each industry.
Gross margin also links to valuation. In DeepTicker's Reverse DCF (which discounts cash flows), one of the assumptions the price discounts is precisely the evolution of margins: many expensive stocks are only justified if their margin improves over the years. Seeing that requirement written out —"the price assumes the margin rises from 60% to 70%"— lets you judge whether it's credible, instead of accepting the valuation blindly. Quality (moat) and price (discounted cash flow) are looked at together.
How Gross margin is calculated
Gross margin (%) = (Sales − Cost of sales) / Sales × 100 = Gross profit / Sales × 100
- · Sales: total revenue from selling products or services (the turnover)
- · Cost of sales (COGS): direct cost of producing what's sold (raw materials, production labor, purchase of merchandise)
- · Gross profit: what's left after subtracting the cost of sales from revenue
- · Result: percentage of each euro of sales that's left to cover the rest of the expenses and generate profit
- · Important: it only includes DIRECT costs of production; it does not include marketing, administration, R&D, interest or taxes
Example of Gross margin
A software company bills €100 million a year. The direct cost of operating its service (servers, platform technical support, hosting) is €18 million. Its gross profit is 100 − 18 = €82 million, and its gross margin = 82 / 100 = 82%. It's very high, and it makes sense: once the software is developed, serving one more customer costs very little. That 82% leaves it an enormous cushion to invest in sales, R&D and still make money. A gross margin like that, maintained over time, usually accompanies businesses with switching costs or a network effect, two classic sources of moat.
Compare it with a supermarket chain that also bills €100 million. Its cost of sales (the merchandise it buys from suppliers and resells) is €78 million, so its gross margin = 22 / 100 = 22%. It looks poor next to software's 82%, but it isn't: the supermarket earns through volume and turnover, selling a great deal with a small margin on each product. The mistake would be to compare them directly and conclude that software is "four times the better business": they're different models. In DeepTicker, the DeepScore judges each margin against the benchmark of its own sector, so a 22% can be an excellent score in distribution while a 60% would be weak in elite software.
How to interpret Gross margin
- →A high and stable gross margin compared with its sector usually indicates pricing power and, therefore, a possible competitive advantage (moat).
- →Always judge it by sector: a 30% is excellent in automotive and poor in software; the isolated number means nothing.
- →The trend matters as much as the level: a gross margin that rises indicates efficiency or pricing power; one that falls warns of competition or costs not passed on.
- →It's the ceiling of profitability: all the other expenses come out of it, so a narrow gross margin leaves little cushion for the unexpected.
- →Compare it with the operating margin and the net one to see where the money stays (structure, marketing, R&D, interest).
- →A sustained fall in gross margin usually anticipates the deterioration of the moat long before it shows up in the bottom line.
Common mistakes with Gross margin
- ✕Comparing gross margin across different sectors and concluding that a company is "better" because its percentage is higher.
- ✕Looking at a single quarter or year instead of the historical series, where the real trend of the margin shows.
- ✕Confusing gross margin with net margin: the gross one only subtracts the direct cost of production, not marketing, interest or taxes.
- ✕Ignoring that different companies classify costs in somewhat different ways, which distorts literal comparisons.
- ✕Assuming a high gross margin guarantees a good investment while forgetting the price: an excellent business bought expensive can perform poorly.
What is a good gross margin: high or low by sector
There's no universal "good gross margin"; it depends on the sector. In software and digital services, the norm is 70-85%, and below 60% you have to look at why. In branded consumer goods it usually runs around 40-60%. In industry and automotive, 15-30% is common. In distribution, retail and wholesale, 15-25% is to be expected because the model is based on volume, not margin per unit.
The right question isn't "is it high?" but "is it high for its sector and stable or rising over time?". A gross margin of 35% is magnificent for a carmaker and poor for a software company. That's why comparing it with competitors in the same sector and with its own historical series is much more informative than looking at the isolated number.
A gross margin consistently above the sector average is one of the clearest signs of competitive advantage: it indicates the company can charge more or produce more cheaply than its rivals in a sustained way. That's why in DeepTicker the Profitability dimension of the DeepScore doesn't compare against a fixed number, but against the sector benchmark, which is the only fair way to judge it.
How gross margin is calculated step by step
You need two figures from the income statement: sales (the turnover) and the cost of sales or COGS (the direct cost of producing or buying what's sold). You subtract: sales minus cost of sales gives you the gross profit. Then you divide the gross profit by sales and multiply by 100 to get the gross margin as a percentage.
For example, if a company sells for €250 million and its cost of sales is €150 million, the gross profit is €100 million and the gross margin is 100 / 250 × 100 = 40%. The key step is to correctly identify what goes into COGS: only the direct costs of production. Marketing, administration, R&D, interest and taxes do NOT go here; those are subtracted further down, in the operating and net margins.
One detail to watch is that different companies classify costs in somewhat different ways (for example, where they put the depreciation of the factory), which can mean two gross margins aren't entirely comparable. That's why it's a good idea to look at each company's trend separately and, when comparing between companies, to also go down to the operating margin, which captures the full cost structure.
Gross margin versus operating margin and net margin
The three margins form a cascade. The gross margin subtracts only the direct cost of production. The operating margin also subtracts the costs of the activity (sales, marketing, administration, R&D) and measures the profitability of the business itself. The net margin also subtracts the interest on the debt and taxes, and is what really remains for the shareholder out of each euro of sales.
Comparing them reveals where the money goes. A company with a gross margin of 70% but an operating margin of 10% is spending a great deal on acquiring customers or on structure (typical of companies in full expansion). One with a gross margin of 25% but an operating one of 12% is extremely efficient with fixed costs. The distance between the margins tells a story that no isolated margin reveals.
That's why what's useful is to read the full cascade, not fixate on a single level. In DeepTicker you can see the three margins and their evolution, which lets you understand the business model: whether a company is "expensive to produce but cheap to operate" or the reverse, and how that has changed over time. It's the difference between seeing a still photo and understanding the film.
How to see the gross margin of any stock in DeepTicker
In DeepTicker you can search for any stock from the US, Europe, the IBEX and China and see its gross margin already calculated and compared with its sector, without having to open the income statement or do divisions. The Profitability dimension of the DeepScore incorporates it together with the other margins and the ROIC, and since each figure comes explained, you understand whether a 40% is good or weak in that specific industry.
To find companies with high and stable gross margins, DeepTicker's search / screener offers more than 140 filters and 15 presets: you can narrow by gross margin, see its evolution and combine it with low debt and a high ROIC to locate businesses that look like they have pricing power. Then you analyze the short list one by one.
Remember that a high margin isn't enough for a stock to be a good investment: you also have to look at the price. DeepTicker's Reverse DCF (which discounts cash flows) shows you whether the current price already takes for granted that those margins will improve, which lets you judge whether the valuation is credible. This is educational information, not financial advice; the decision is yours.
On DeepTicker you get this metric calculated and explained for thousands of stocks, with no spreadsheets.
Try DeepTicker free →Frequently asked questions about Gross margin
What is a company's gross margin?
It's the percentage of each euro of sales that the company keeps after paying the direct cost of producing what it sells (raw materials, factory labor, purchase of merchandise). It's calculated as gross profit divided by sales.
How is gross margin calculated?
You subtract the cost of sales from revenue to get the gross profit, divide it by sales and multiply by 100. For example, selling 250 with a cost of 150 gives a gross profit of 100 and a gross margin of 40%.
What is a good gross margin?
It depends on the sector. In software the norm is 70-85%, in branded consumer goods 40-60%, in industry 15-30% and in distribution 15-25%. A good gross margin is one that's high for its sector and stable or rising over time.
What's the difference between gross margin and net margin?
Gross margin only subtracts the direct cost of production. Net margin also subtracts all the expenses (marketing, administration, R&D), the interest on the debt and taxes, so it measures what really remains for the shareholder.
Why does a company's gross margin fall?
It usually falls due to more competition (which forces price cuts), cost inflation not passed on to the customer or a shift toward lower-value products. A sustained fall can indicate that the moat is eroding.
Does a high gross margin mean the stock is a good buy?
Not on its own. A high gross margin indicates a good business, but not whether the stock is cheap. You have to combine quality (margins, ROIC) with the valuation of the price to know whether it's a good investment.
How do I see a stock's gross margin in DeepTicker?
DeepTicker calculates it and compares it with the sector within the Profitability dimension of the DeepScore. You can search for any stock from the US, Europe, the IBEX or China and see the margin with its context explained, without opening the income statement.
Educational content by DeepTicker. This is not financial advice or a recommendation to buy or sell. Investing involves risk of loss.
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