PACQ- NAS (USA)
Prime Acquisition Corp
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Definition
Gross Margin is the percentage of
Gross Profit out of sales or
Revenue. It is calculated as
Gross margin
= Gross Profit / Revenue
= (Revenue - Cost of Goods Sold) / Revenue
A positive Gross Profit is only the first step for a company to make a net profit. The gross profit needs to be big enough to also cover related labor, equipment, rental, marketing/advertising, research and development and a lot of other costs in selling the products.
Formula
Gross margin = (
Revenue -
Cost of Goods Sold) /
Revenue Explanation
A positive Gross Profit is only the first step for a company to make a net profit. The gross profit needs to be big enough to also cover related labor, equipment, rental, marketing/advertising, research and development and a lot of other costs in selling the products.
Warren Buffett believes that firms with excellent long term economics tend to have consistently higher margins.
Durable competitive advantage creates a high
Gross Margin because of the freedom to price in excess of cost. Companies can be categorized by their
Gross Margin
1. Greater than 40% = Durable competitive advantage
2. Less than 40% = competition eroding margins
3. Less than 20% = no sustainable competitive advantage
Consistency of
Gross Margin is key.
Beaware
If a company loses its competitive advantages, usually its gross margin declines well before its sales declines. Watching gross margin and
Operating Margin closely helps avoid value trap situations.
Related Terms
Operating Margin,
Revenue,
Cost of Goods Sold,
Gross Profit
European Shorting
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