ValueGross Margin#28

Analyst Price Target Upside

The percentage of revenue remaining after subtracting the direct costs of making a product or delivering a service. High gross margins indicate strong pricing power. Software companies often exceed 70%, while retailers typically operate at 25-30%.

Formula

(Revenue - COGS) / Revenue x 100

Description

Shows pricing power and production efficiency by measuring what percentage of revenue remains after direct costs. Warren Buffett has noted that companies with consistently high gross margins tend to have durable competitive advantages. It is the first line of defense in profitability analysis.

Interpretation

Above 40% generally indicates strong pricing power. Software companies often exceed 70%, while retailers may operate at 25-30%. The trend matters as much as the absolute level. Declining gross margins may signal eroding competitive position.

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Price-to-Earnings Ratio TTM (P/E)P/E

Compares a stock's price to its earnings per share over the past 12 months. A lower P/E suggests you pay less for each dollar of profit the company generates.

Forward Price-to-Earnings (Forward P/E)

Compares today's stock price to next year's estimated earnings per share. It reflects what the market expects the company to earn, not what it has already reported.

Price-to-Book Ratio (P/B)P/B

Compares a stock's market price to its book value per share - the accounting value of the company's net assets. A ratio below 1.0 means the stock trades below its stated asset value.

Price-to-Sales Ratio (P/S)P/S

Compares a stock's price to its revenue per share. Useful for valuing companies that are not yet profitable, since revenue is harder to manipulate than earnings.

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