top of page

Gross Margin

Understanding the Gross Margin Ratio: Measuring Production Cost Efficiency

The Gross Margin Ratio is a financial metric that measures the proportion of money left over from revenues after accounting for the cost of goods sold (COGS). It indicates the percentage of sales revenue that exceeds the COGS, reflecting the efficiency of a company in managing its production costs relative to its sales.

Gross Margin = (Net Sales−Cost of Goods Sold (COGS)) / Net Sales ×100


Suppose Company XYZ has the following financial details:


  • Net Sales: $1,500,000

  • Cost of Goods Sold (COGS): $900,000


To calculate the Gross Margin Ratio:


  1. Subtract COGS from net sales: 1,500,000−900,000=600,000 

  2. Divide by net sales and multiply by 100: (600,000 / 1,500,000)×100=40%

A Gross Margin Ratio of 40% indicates that Company XYZ retains 40% of its sales revenue after covering the cost of goods sold. This suggests a strong ability to manage production costs relative to sales.

Profitability Ratio

bottom of page