How to calculate Gross Margin?
Now that we have looked at different levels of revenue and costs, let's look at different levels of margin that we get by deducting various levels of costs from revenue.
Let's start with Gross Margin (GM).
Gross Margin is the financial metric indicating the difference between net revenue and the cost of goods sold (COGS), represented as a percentage of net revenue.
It assesses the efficiency of a business in managing its production costs relative to its revenue.
Example:
An Indian apparel company reports a net revenue of ₹1,00,000 and COGS of ₹30,000.
The gross margin for the company is calculated as follows:
Gross Margin = [(Net Revenue - COGS) / Net Revenue] × 100%
[(₹1,00,000 - ₹30,000) / ₹1,00,000] × 100% = 70%.
Significance of GM:
Gross margin is an essential indicator of a company's financial health. A higher gross margin implies that the company retains a larger proportion of revenue after accounting for the costs associated with producing or acquiring the goods sold.