Gross margin is a measure of a company's profitability that represents the percentage of revenue that the company retains after accounting for the cost of goods sold. It is calculated by dividing the company's gross profit by its total revenue.
Here is an example of how to calculate gross margin:
Let's say that a company has the following financial information for the year:
Total revenue: $1,000,000
Cost of goods sold: $600,000
To calculate the company's gross margin, we first need to calculate its gross profit, which is the amount of money it makes from its sales after accounting for the cost of goods sold. In this case, the company's gross profit would be $1,000,000 - $600,000 = $400,000.
Next, we would divide the company's gross profit by its total revenue and multiply the result by 100% to convert it to a percentage. In this case, the company's gross margin would be $400,000 / $1,000,000 = 40%.
This means that the company makes a profit of 40% on each dollar of revenue it generates. A high gross margin is generally considered to be a good sign, as it indicates that a company is able to generate a lot of profit from its sales.