What does gross margin tell traders?
Gross margin tells traders a few things. First, it tells them how much of a company’s revenue (the total amount of money received) is kept as a profit. So, if the gross margin is 22%, it means the company has made $0.22 in profit from every $1 in revenue. This helps the trader to establish if a company is using its money efficiently. Secondly, it gives them insight into what shareholders might receive, as dividends are paid from profits. Lastly, it helps the trader to compare competitor companies to each other.
In a nutshell, gross margin is an element of fundamental analysis that enables traders to gain key insights into what decisions management might make in the future.
Gross margin also offers useful insights for the companies themselves. It can be used to measure production costs against revenue. If the gross margin is very low, the business may want to cut production and manufacturing costs to up its profits.