Fire Your Stock Analyst!: Analyzing Stocks on Your Own

Gross Margin

Theoretically, gross income is the profit made on a product considering only the costs of materials and labor to produce the product.

Gross profit is sales less the cost of sales:

gross profit = total sales – cost of sales

Gross margin is the gross profit divided by total sales:

gross margin = gross profit/sales

When Home Depot sells a hammer, its gross profit is the difference between the sales price and the price that Home Depot paid for the item. The costs to put the hammer on the shelves, advertise it, ring up the sale and put the hammer in a bag are not considered in the gross profit calculation. The product costs are labeled cost of goods sold, or cost of sales on the company’s operating statement.

The hammer example holds ...