Gross profit as a percentage of revenue; how much of every sales dollar survives the direct cost of producing it.
Gross margin is largely set by pricing power and input costs, so it is the cleanest read on competitive position. It also sets the ceiling on every margin below it: a business at 20% gross margin cannot run a 25% operating-margin no matter how lean the overhead.
Compare only within an industry and watch for classification differences, since where a company draws the line between cost-of-goods-sold and operating-expenses changes the number without changing the economics.
Example: Northwind Tools earns $370M of gross profit on $840M of revenue, a 44.0% gross margin. Northwind Cloud's software revenue runs at 78%, while the retail arm runs at 31%.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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