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Gross margin definition
Gross margin is a way of measuring the amount of profit a company can make from its revenue.
It is calculated by subtracting the cost of all goods sold from total revenue, and then dividing that figure by its total revenue. That leaves a percentage figure which represents the portion of revenue that can be kept by the company as profit.
If a company has a 20% gross margin and makes £100 million in a year, then its profit would be £20 million. Some or all of that £20 million would still need to be spent on paying shareholders or other business expenses.
Gross margin levels can be hugely different depending on a business’s industry or other factors.
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