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Glossary
Profit & cash

Gross margin

What is left of each pound of sales after the direct cost of making the thing.

Gross margin is the purest measure of pricing power available in the accounts. A company that can charge far more than it costs to produce is either selling something scarce, something branded, or something nobody else can make.

Watch its direction more than its level. A falling gross margin, sustained over several years, almost always means competition has arrived and the moat is draining.

The formula
Gross margin = (Revenue − Cost of goods sold) ÷ Revenue
Figure

The divergence that precedes most disasters

Y1Y2Y3Y4Y5Reported profitOperating cash

Reported profit climbing while the cash it supposedly generated goes nowhere. Either customers are not paying, or the sales were never really made.

Why it matters

It is the earliest place a deteriorating competitive position shows up, long before net income moves.

The mistake everyone makes

Comparing gross margins across industries. Software runs at 80%, groceries at 25%. Only compare like with like.

Related terms

Operating margin
Profit from the core business, as a share of sales, before interest and tax.
Economic moat
Whatever stops competitors from competing away a company's profits.
Net margin
The bottom line, as a percentage of sales.

See Gross margin on a real company

SteadyShares pulls this straight from the filings for 1,100+ companies, alongside moat scores, DCF fair value and peer comparison. Free to look around.

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