Cost of Goods Sold & Gross Profit
What it costs to make the thing, and the first profit line that reveals pricing power.
Cost of Goods Sold (COGS) is the direct cost of making what the company sells — raw materialsA raw material (gold, oil, copper) traded on exchanges., factory labour, the wholesale cost of inventory. Subtract it from revenue and you get gross profit.
Gross profit = Revenue − COGS; Gross margin = Gross profit ÷ Revenue
Gross margin is the % of each sales rupee left after the direct cost of making the product.
Gross marginThe deposit required to hold a leveraged position. is a quiet superpower indicator. A consistently high or rising gross marginThe deposit required to hold a leveraged position. usually means pricing power — the company can charge well above what it costs to produce, often a sign of a brand or moat. A thin, shrinking margin means it’s competing mostly on price.
ExampleA luxury-brand maker with 70% gross marginThe deposit required to hold a leveraged position. keeps ₹70 of every ₹100 sale after production — huge pricing power. A commodityA raw material (gold, oil, copper) traded on exchanges. steelmaker at 15% keeps just ₹15 — it’s a price-taker. Same “profit” word, completely different business quality.
Key takeawayCOGS is the direct cost of the product; revenue − COGS = gross profit. Gross marginThe deposit required to hold a leveraged position. reveals pricing power — high and stable is a moat hint.
FAQs
What’s a “good” gross margin?
It’s entirely industry-dependent — software can exceed 80%, groceries run single digits. Compare a company only to its own history and direct peers; the trend (rising/stable/falling) matters more than the absolute level.