Revenue minus cost of goods sold, divided by revenue — the percentage of each rupee of revenue that remains after direct production costs.
Deeper Explanation
Gross margin is a direct measure of pricing power and structural competitive advantage. A business with 70% gross margins (typical for software) retains 70 rupees from every 100 in revenue before sales, R&D, and administration costs — giving it enormous flexibility to invest in growth. A business with 15% gross margins (typical for retail or contract manufacturing) must manage every rupee carefully. High gross margins are not sufficient for a great investment, but they are nearly always necessary. Gross margin expansion over time indicates growing pricing power or improving operational efficiency; compression signals competitive pressure or rising input costs.
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