Glossary term
Gross Margin
Revenue minus cost of goods sold, divided by revenue. A simple quality gauge. SaaS compounders sit at 70-85%, semiconductor designers at 50-70%, commodity producers below 30%. Expanding gross margin usually signals pricing power; contracting margin is an early warning. HALO 100 screens compounders on sustained gross-margin levels.
Definition & Context
Gross Margin = (Revenue − Cost of Goods Sold) / Revenue. It captures how much value a company adds beyond the direct cost of producing its product. Because COGS is usually the cleanest cost line on a P&L, gross margin is harder to fudge than operating or net margin. Typical bands: software 70–90%, branded consumer 40–60%, semiconductors 45–65% (logic) and 30–50% (memory), retail 20–40%, commodity extractors single-digit to 20%.
The trajectory matters more than the level. Sustained expansion — 200–400bps per year for five-plus years — is the signature of a company with widening moat or pricing power. Sustained compression almost always precedes trouble: competitor entry, input-cost shock, or a product mix shift toward lower-value lines. Closelook’s HALO 100 uses rolling five-year gross-margin expansion as one of four quality screens; Rubin Build-Out 100 is less strict because infrastructure cyclicals routinely absorb margin hits during capex buildouts.
Why It Matters for Investors
Gross margin is the earliest financial tell that a business model is strengthening or decaying. Because it sits at the top of the P&L, it moves before operating leverage or cash flow does. Investors who track gross-margin trends catch thesis breaks roughly two quarters before earnings-per-share screens notice. In practice, this is why HALO 100 triggers constituent review on any four-quarter gross-margin contraction, regardless of what EPS says.
Related Concepts
Gross Margin sits alongside EBITDA Multiple and Net Retention as the three core quality screens. A widening gross margin is the clearest empirical evidence of a Moat.