{"id":5867,"date":"2022-07-23T11:56:00","date_gmt":"2022-07-23T03:56:00","guid":{"rendered":"https:\/\/www.granitefirm.com\/blog\/us\/?p=5867"},"modified":"2025-11-10T18:33:57","modified_gmt":"2025-11-10T10:33:57","slug":"gross-margin","status":"publish","type":"post","link":"https:\/\/www.granitefirm.com\/blog\/us\/2022\/07\/23\/gross-margin\/","title":{"rendered":"Gross margin is a great indicator to judge the management"},"content":{"rendered":"\n<p>I cover gross margins in my book, &#8220;The Rules of Super Growth Stocks Investing&#8221;, section 4-2. But without discussing its importance, the purpose of this article is to explain why gross profit is so important to a business. And why does the management team play a role in gross margin.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_84 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #ffffff;color:#ffffff\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #ffffff;color:#ffffff\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/07\/23\/gross-margin\/#Wouldnt_the_ROE_be_better\" >Wouldn&#8217;t the ROE be better?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/07\/23\/gross-margin\/#How_to_calculate_gross_margin\" >How to calculate gross margin<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/07\/23\/gross-margin\/#The_impact_of_gross_profit_on_the_business\" >The impact of gross profit on the business?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/07\/23\/gross-margin\/#Related_articles\" >Related articles<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Wouldnt_the_ROE_be_better\"><\/span>Wouldn&#8217;t the ROE be better?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Indeed. But have you ever thought about it? Many US-listed companies are losing money. How can they calculate the return on equity (ROE) without positive earnings? However, most listed companies must have revenue and can calculate the gross margin.<\/p>\n\n\n\n<p><a href=\"https:\/\/www.investors.com\/etfs-and-funds\/sectors\/sp500-companies-losing-tons-of-money-are-making-investors-rich\/#:~:text=All%20told%2C%20more%20than%201%2C600,of%20public%20companies%20lost%20money.\" target=\"_blank\" rel=\"noreferrer noopener\">Over the past 12 months, more than 1,600 S&amp;P 1500 and S&amp;P Completion companies have lost money<\/a>. This means that 41% of companies lost money during this period. That&#8217;s down slightly from the 2020 COVID-19 pandemic. In 2020, half of listed companies lost money. Note that these two indexes are all larger companies, and if the entire U.S. stock market were sampled, the proportion would rise by a lot.<\/p>\n\n\n\n<p>You can refer to my previous blog post &#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/05\/the-most-important-indicator-to-judge-management-team-roe\/\" target=\"_blank\" rel=\"noreferrer noopener\">ROE, the most important management indicator<\/a>&#8220;.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_to_calculate_gross_margin\"><\/span><strong>How to calculate gross margin<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Gross profit rate = (operating income-operating cost) \/ sales income \u00d7 100%<\/p>\n\n\n\n<p>The calculation of gross profit is simple; it is operating income minus operating costs. It can be seen from the algorithm that there is only one factor that determines gross profit-that is, operating costs, there are no other factors between revenue and gross profit (this is very important). Don&#8217;t forget that operating income is the only trustworthy and unchangeable figure in the financial report. It is the source of all figures in the financial report. The figures in other financial reports are calculated from this. Therefore, operating costs can be kept down and gross profit margin can be increased.<\/p>\n\n\n\n<p>Why does gross profit margin have a great relationship with the management team? Because the biggest factor in determining the gross profit rate of a company is the industry in which the company is located &#8211; &#8220;The level of gross profit margin represents the competitiveness of the company&#8217;s products.&#8221; Therefore, if the gross profit margin is significantly higher than that of its peers, the company\u2019s \u201cbasic\u201d costs will be controlled. <\/p>\n\n\n\n<p>If it is matched with other \u201cderived\u201d operating profit margins, earnings before interest and taxes (Earnings Before Interest and Taxes, EBIT), Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), and net interest rate. Then through various cost control and legal financial adjustments, the final earnings per share (EPS) can be increased. Having high earnings per share, of course, can increase the price-to-earnings ratio, the company&#8217;s market valuation, and push up the company&#8217;s stock price.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"207\" height=\"108\" src=\"https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2022\/07\/GrossMargin.jpg\" alt=\"Gross margin\" class=\"wp-image-12473\"\/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"The_impact_of_gross_profit_on_the_business\"><\/span><strong>The impact of gross profit on the business?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Companies with high gross profit margins will be in a more favorable position in terms of long-term business performance. This is because:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>A higher gross profit margin enables the company to maintain a stable business level, which is conducive to the long-term operation of the company and the adjustment of its development direction; that is, it can ensure the continuity of the company&#8217;s operations.<\/li>\n\n\n\n<li>A higher gross profit margin can expand the scale of profit and the performance of operations. Without better gross profit, a higher profit margin cannot be guaranteed.<\/li>\n<\/ul>\n\n\n\n<p>And generally speaking, large companies have a great advantage in driving gross profit margins. This is because:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Large companies have a larger revenue base, which affects the total gross profit. The larger the total amount, the more profit that can be used.<\/li>\n\n\n\n<li>Operating profit is the result of total operating expenses deducted from gross profit.<\/li>\n<\/ul>\n\n\n\n<p>The above factors involve all the links of the company, and cannot be solved by a single financial project or department; this is why I say: the ability and performance of the enterprise management team can be seen from the gross profit margin, because this is a cross-department It takes courage to execute.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Related_articles\"><\/span>Related articles<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/11\/08\/5-ways-to-improve-earning\/\">5 ways to improve company earning<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/05\/10\/the-most-important-indicator-to-judge-management-team-roe\/\" target=\"_blank\" rel=\"noreferrer noopener\">ROE, the most important management indicator<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/07\/23\/gross-margin\/\" target=\"_blank\" rel=\"noreferrer noopener\">Gross margin is a great indicator to judge the management<\/a>&#8220;<\/li>\n<\/ul>\n\n\n\n<p><em><strong>Disclaimer<\/strong><\/em><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>The content of this site is the author\u2019s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.<\/em><\/li>\n\n\n\n<li><em>I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers&#8217; direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.<\/em><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Wouldn&#8217;t the ROE be better? Many US-listed companies are losing money. How can they calculate the return on equity (ROE) without positive earnings? However, most listed companies must have revenue and can calculate the gross margin.<\/p>\n","protected":false},"author":1,"featured_media":12473,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[175,222,172,174,205,386,206,384,176,385,178,177],"tags":[],"class_list":["post-5867","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-gross-margin","category-ceo","category-ebitda","category-eps","category-fundamental-analysis","category-gross-income","category-management-team","category-net-income","category-net-margin","category-operating-income","category-operating-margin","category-revenue"],"_links":{"self":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/5867","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/comments?post=5867"}],"version-history":[{"count":23,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/5867\/revisions"}],"predecessor-version":[{"id":39834,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/5867\/revisions\/39834"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media\/12473"}],"wp:attachment":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media?parent=5867"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/categories?post=5867"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/tags?post=5867"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}