QualityOCF Margin#33
Gross Margin measures how efficiently a company converts capital into earnings. Value investors to find compounders with durable economic moats when Gross Margin aligns with the rest of the VMCI.
By Javier Sanz, Founder & Lead AnalystEditorially reviewed
Last updated: Reviewed by: Javier Sanz
Formula
Operating Cash Flow / Revenue x 100
Description
The percentage of revenue converted to operating cash flow before capital expenditures. This metric bridges the gap between accounting profitability and cash generation. It is useful for spotting companies that report profits but struggle to collect cash.
Interpretation
Above 15% is strong. Compare to operating margin: if OCF margin significantly exceeds operating margin, the company may have favorable working capital dynamics. Persistent gaps between the two deserve investigation.
Related metrics: Return on Equity (ROE), Return on Assets (ROA). (Updated 2026)
Further Reading
- SEC EDGAR primary filings on Gross Margin- Primary source filings used to calculate Gross Margin.
FAQ
How is Gross Margin calculated?+
Gross Margin uses the formula: Operating Cash Flow / Revenue x 100. Software median gross margin is 75%; consumer goods 35-45%. ValueMarkers refreshes the calculation within 24 hours of each new SEC filing using SEC EDGAR 10-K + 10-Q filings (segment-level disclosures).
What is a good Gross Margin value by sector?+
There is no single 'good' value for Gross Margin — context is sector-driven. Software median gross margin is 75%; consumer goods 35-45%. The /screener exposes sector-relative percentiles for Gross Margin on every ticker, so you can compare against the sector median rather than the broad-market median.
Which investors use Gross Margin?+
Charlie Munger, Joel Greenblatt, Terry Smith cite Gross Margin as a key input to to find compounders with durable economic moats. The academic anchor is Greenblatt (2005) Magic Formula and Mauboussin (2014). ValueMarkers weights this within the Quality pillar of the VMCI score (30% of total).
What are the limitations of Gross Margin?+
Gross Margin can mislead in asset-light businesses where conventional capital ratios mislead. Pair Gross Margin with at least two cross-checks from other VMCI pillars — for example, free cash flow trend, balance-sheet quality, and earnings consistency — before drawing a single-metric conclusion.
Where can I see live Gross Margin data?+
Visit any /stock/[ticker] page on ValueMarkers to see live Gross Margin data, sector percentiles, and the VMCI composite score that integrates Gross Margin with 119 other indicators across 100,000+ stocks. The free /screener exposes Gross Margin as a filterable column.
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Related Quality Indicators
Return on Equity (ROE)Op Margin
Return on Equity measures how efficiently a company converts capital into earnings.
Return on Assets (ROA)Net Margin
Return on Assets is the metric used to how efficiently a company converts capital into earnings.
Return on Invested Capital (ROIC)EBITDA Margin
Return on Invested Capital measures how efficiently a company converts capital into earnings.
Return on Capital Employed (ROCE)FCF Margin
Return on Capital Employed is the metric used to how efficiently a company converts capital into earnings.
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