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What are gross margins? They're not actually gross.

Well... right now U.S. companies are afraid their margins are about to become disgusting.

First off, gross profit is sales minus cost of sales (the amount the company had to pay to obtain or build the product it sells).

Gross margin is the percent of sales the company retained after accounting for the cost of those sales. It measures how bang the company is getting for its buck.

It's like when you go to a big coffee chain and get a nice coffee for, say, 6 bucks. And let's say that coffee tastes so good, you're happy to pay 6 bucks for it. You're getting some bang for your buck. You're getting some degree of marginal benefit (the reward of the good taste minus the cost of the coffee).

But what if you could go to the deli near where you live, and nobody knows, but this deli makes killer coffee. And it's only 4 bucks. You're getting better coffee for a lower price - more bang for your buck! In technical terms, your benefit was at a wider margin that it was at the big coffee chain (better taste minus fewer dollars).

A similar idea applies for companies' gross margins.

First, let's go over the calculation for gross margin before we flesh out its importance.

Company 'X' sells cars. It has a cost to make the car, so metal, leather, all those materials. That's its cost of sales (or cost of goods sold).

X sells \$100 worth of cars in one year. It's cost of goods sold was \$40. It's gross profit was \$60, but what was its gross margin?

Well it retained \$60 of \$100 of its sales, so the gross margin was 60%.

But what if the cost of the steel to make the car rose in price because of tariffs (and you can see how tariffs work in our tariff explainer)?

Now, the total cost of sales is \$45 a year. Now, we're doing \$100 minus \$45, which is \$55 of gross profit, for a gross margin of 55%.

The automaker is getting less bang for its buck.

Gross margins are important for analysts and investors to understand how much money a company on each product it sells. One car selling for \$10 - and costing the manufacturer \$4.50 cents to make - nets the company \$5.50.

The company would love to raise prices to keep its gross margin at 60%, but if it does so, it could see number of cars sold fall! Hint.... that's what has happened to General Motors and Ford.

Here's the point:

Scanning for good companies to buy? Given the tariffs, which hurt companies' gross margins, look for companies that can easily raise prices or that don't buy goods subject to tariffs and cost increases.

What are gross margins?

First off, gross profit is sales minus cost of sales (the amount the company had to pay to obtain or build the product it sells).

Gross margin is the percent of sales the company retained after accounting for the cost of those sales. It measures how bang the company is getting for its buck.

It's like when you go to a big coffee chain and get a nice coffee for, say, 6 bucks. And let's say that coffee tastes so good, you're happy to pay 6 bucks for it. You're getting some bang for your buck. You're getting some degree of marginal benefit (the reward of the good taste minus the cost of the coffee).

But what if you could go to the deli near where you live, and nobody knows, but this deli makes killer coffee. And it's only 4 bucks. You're getting better coffee for a lower price. That's more bang for your buck. In technical terms, your benefit was at a wider margin that it was at the big coffee chain (better taste minus fewer dollars).

A similar idea applies for companies' gross margins.

Now see the video above to really learn it.

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