Lesson 1 of 8
Reading a gross margin
There is no cross-industry level at which a gross margin is good. Two companies with identical economics can report margins ten points apart.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- Two companies with identical costs can report gross margins ten points apart, because no rule fixes what sits in cost of revenue.
- Inside one sector the spread between companies is wider than the gap between sector medians.
- The margin's stability through a period of rising input costs is closer to evidence of pricing power than the level ever is.
Gross margin is revenue less the cost of producing it, divided by revenue. There is no rule for what belongs in that cost, so the same economics can produce two different margins depending only on where a company draws the line.
Gross margin by sector, US companies
- Energy · 114 companies26.54%
- Industrials · 417 companies30.12%
- Technology · 536 companies, quartiles 31.66 to 70.9149.27%
- Healthcare · 433 companies61.80%
Median, all US companies: 39.39%
One line, two policies
The gap is 100 of production depreciation. Company A puts it in cost of revenue; Company B puts it below the gross profit line. Every cost is the same, every product is the same, and the margins sit ten points apart while operating income does not move at all. Which staff costs, share-based pay included, count as cost of revenue is a classification choice too, and capitalised software moves the same way: under ASC 718 (Accounting Standards Codification, the US rulebook for a given topic.) and the capitalise-or-expense choice, where the spending is booked changes the gross line without changing the business.
The spread inside one sector
Across the 2,401 US companies with a computed gross margin on 2026-09-07, the median was 39.39 percent. Technology's own quartiles ran from 31.66 percent to 70.91 percent, a wider gap than the distance from the lowest sector median (Energy, 26.54 percent) to the highest (Healthcare, 61.80 percent). A company placed at its sector median is being compared against neighbours that do not resemble it, which is why a percentile inside a narrower peer group reads better than a sector average.
Where the margin stops existing
Banks, insurers and REITs are read on other lines, so 617 companies were excluded as not applicable, carried as n/a rather than zero.
A second failure is worse, because the number exists and misleads. Under ASC 606, a marketplace can report revenue gross, as principal, or net, as agent, which can change reported revenue by an order of magnitude with no change to profit. Reporting gross gives a thin margin on a large revenue line; reporting net gives a high margin on a small one. If two companies in the same activity report very different gross margins, check the revenue recognition policy before concluding anything about pricing.
Why the trend outweighs the level
Bruce Greenwald's franchise argument, in Value Investing: From Graham to Buffett and Beyond, holds that a business earning more than the cost of its assets must be protected by a barrier to entry, or the gap closes. A filing cannot show the barrier directly. A gross margin held through a period of rising input costs is the closest trace of one; a margin that fell in the same conditions is evidence the other way.
Do it on a real 10-K
- Open Item 8's first note (accounting policies) and read what the company puts in cost of revenue.
- Check the revenue recognition note for a principal-versus-agent conclusion.
- Put five years of gross margin next to input-cost commentary in Item 7.
Check yourself
Two companies have identical products and costs but gross margins ten points apart. What is the most likely cause?
- One company is more efficient
- They classify costs differently between cost of revenue and operating expense
- One company has pricing power and the other does not
Show the answer
Answer: B.
No rule fixes what sits in cost of revenue, so identical economics can be presented as different gross margins with operating income unchanged.Why is there no single benchmark gross margin?
- The data is not available
- The spread inside one sector is wider than the gap between sector medians
- Gross margin does not vary by industry
Show the answer
Answer: B.
Technology's own quartiles span a wider range than the distance between the highest and lowest sector medians in the table.Two marketplaces report very different gross margins for the same activity. What should you check first?
- Their advertising spend
- Whether each reports revenue gross (as principal) or net (as agent)
- Their share count
Show the answer
Answer: B.
The principal-versus-agent conclusion under ASC 606 can change reported revenue by an order of magnitude with no change to profit or business.Sources
- Fridson and Alvarez, Financial Statement Analysis: A Practitioner's Guide, on statements prepared by parties with an interest in the impression they create.
- Greenwald, Kahn, Sonkin and van Biema, Value Investing: From Graham to Buffett and Beyond, 2001, on the franchise test.
- ASC 606, Revenue from Contracts with Customers, and ASC 718, Compensation, Stock Compensation.
- The gross margin distribution published on the open research pages of ValueScreener, built 2026-09-07.
What this leaves out
- The distribution was built 2026-09-07 from filed statements and is rebuilt on a schedule; later readers see different breakpoints.
- Sector is a mixed classification: the data vendor's where it supplied one, and since 2026-09-12 derived from the filed SIC code on the SEC's own submissions record where it did not. A company spanning two sits in one, and the 617 excluded companies are banks, insurers and REITs.
- Gross margin says nothing about the capital needed to earn it; the returns lessons later in this course cover that gap.
- Nothing here is advice about any security.