Gross margin
Gross profit over revenue. It answers a question about the product — pricing power and what it costs to make — and nothing about overheads.
Where you will meet it
Gross margin appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Build a common-size income statement and explain what it shows
“The technique is most useful when one line is moving against the others: rising selling costs as a share of revenue while gross margin holds points at a very different problem from the reverse.”
- Judge how good a company's financial reports are
“The Beneish model combines such signals: a days sales in receivables index above 1, gross margin index above 1, asset quality index above 1 and high accruals raise the M-score, and a score above about −1.78 suggests likely manipulation.”
- Work out profitability margins and explain what they mean
“Gross margin is gross profit over revenue and reflects pricing power and production cost.”
- Judge the quality of a company's earnings
“Check whether gross margin improvements came from lower reserves or capitalised costs, and see how much of profit rests on gains or reserve releases.”
See also
Practise it
Practise gross margin until it is automatic: questions that explain every wrong option.
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