Profitability
Gross margin
What it is
Gross margin measures what percentage of revenue remains after direct production costs. It tells you what the company earns before overhead, marketing, R&D, etc.
How to read it
Gross margin is an excellent indicator of pricing power. A rising gross margin signals either premiumization or cost dilution. A falling gross margin is often the first sign of competitive pressure.
Common reference points
- Strong (software, strong brands)> 60%
- Healthy40 – 60%
- Moderate20 – 40%
- Weak (retail, manufacturing)< 20%
Orders of magnitude, not a rule: the same number does not mean the same thing from one sector to the next.
What it does not tell you
Like other margins, interpret in sector context. Watch especially the trend over time: stability or growth in gross margin is a great signal.
Other measures — Profitability
Educational content. Polaris is not a registered investment adviser and makes no recommendation.