This is the difference between a firm’s sales and cost of sales expressed as a percentage.

So for example if a firm makes annual sales of £500m and incurs cost of sales (direct costs of making sales) of £400m, gross profit is £100m (£500m-£400m) and the gross margin is 20% ((£100m/500m) x 100%). The higher this number the better, as it indicates the extent to which the core activities of a business are profitable. A firm with a low gross margin has little financial wiggle room should trading take a downturn.