Why Investors Should Pay Attention to Gross Margin

January 20, 20247 min read
Why Investors Should Pay Attention to Gross Margin
Share on facebookShare on TwitterShare on Linkedin

Key Takeaways

  • Expressed as a percentage, gross margin is the amount a company makes after factoring in the cost of doing business.
  • Investors and analysts use the metric to determine how well a company turns sales into profits.
  • The chief difference between net margin and gross margin is net margin includes operating expenses, taxes, and interest.

Gross margin offers deep insights into a company’s financial health, operational efficiency, and profitability. As such, it is a crucial metric for investors and companies alike.

By comparing gross margin ratios, investors can assess how well a company manages its production costs relative to its sales revenue. This is markedly important information for making informed investment decisions.

Here is more about why investors should pay attention to gross margin.

Exploring Gross Margin Ratio

Gross profit margin ratio, also known as gross margin ratio, is the percentage of revenue representing gross profit. 

Expressed as a percentage, gross margin is the amount a company makes after factoring in the cost of goods sold (labor and materials, excluding overhead costs).

Investors and analysts use the metric to determine how well a company turns sales into profits. Companies also use gross margin to monitor the effectiveness of some products or services when compared with others. So, it is quite an important tool.

Most companies usually maintain a steady gross profit margin. If the ratio goes up or down at an atypical clip, it could spell problems. For example, there could be issues with the company such as increased costs for raw materials or difficulties with product distribution.

There are a couple of ways to arrive at gross margin, but the quick formula is Gross Margin Ratio = (Revenue – Cost of Goods Sold) / Revenue.

For example, Christine has a cosmetics business with total sales of $1.2 million and a cost of goods sold (COGS) of $450,000. The rent is $300,000, her utilities come to $20,000, and accrued expenses amount to $5,000. The company’s gross profit margin is 62.5%, meaning that for every dollar of sales produced, the company profit 62.5 cents.

Gross Margin Ratio =

$1,200,000 – $450,000

——————————- = 62.5%


Gross Margin vs. Gross Profit

Many people confuse gross margin and gross profit, which are both derived from income statements but show profitability differently. Gross profit is total revenue minus the cost of goods sold. The difference, then, is that gross margin expresses gross profit as a percentage of revenue. Generally, the higher, the better. A low margin indicates room for improvement.

While the two metrics are complementary, the margin (the percentage form) offers more insight than the absolute figure (gross profit). That is because it permits comparisons across goods or services, as well as periods and projections.

Gross Margin vs. Net Margin

Then there is net margin, which is Net Income / Revenue and also expressed as a percentage. Simply put, net margin is the ratio of its net profit to its revenues.

Both margins are used to assess how well a company is generating profits. The chief difference between net margin and gross margin is that the former includes operating expenses, taxes, and interest. Thus, gross margin amounts to a more conservative number.

Both profitability ratios are crucial but serve different analytical purposes. For example, a company can use its net profit margin to discover inefficiencies. It can also determine the effectiveness of its current business model.

What is a Good Gross Profit Margin?

What is considered a “good” gross profit margin varies by industry. A practical way to determine a favorable gross profit entails comparing a company’s percentage to sector averages. Even then, the company’s broader strategies and goals should also be factored in.

A challenge in evaluating whether a company has achieved a positive gross profit margin is the amount of variance that exists across varying industries. 

Overall, the national average is 36.22%. However, the margin for regional banks is 99.75%, and just 9.04% for automotive companies, for example. Service industries tend to report higher margins because their COGS is significantly lower,

Sector-wise, other recent gross profit margins include:

  • Advertising 23.99% 
  • Apparel 49.77%
  • Building materials 23.38%
  • Computer services 27.16%
  • Home furnishings 27.03%
  • Healthcare products 56.94%
  • Household products 50.87%
  • Machinery 34.50%
  • Packaging and container 22.39%
  • Precious metals 50.17%
  • Recreation 37.58%
  • Restaurants and dining 27.60%
  • Retail (general) 24.27%
  • Retail (online) 42.53%
  • Software (Internet) 58.58%
  • Transportation 19.91%

Specific sectors notwithstanding, higher margins typically indicate better efficiency and profitability. To more thoroughly assess a company’s competitiveness and overall financial health, it is advisable to use other metrics such as free cash flow, leverage ratios, and hard costs versus soft costs, in addition to gross profit margin.

How to Calculate Gross Margin Percentage 

To calculate gross margin, subtract from the company’s revenue the cost of goods. This will yield the company’s gross product. That figure is then divided by total revenue and multiplied by 100. That figure is the gross margin.

Note the importance of having accurate “cost of goods sold” and revenue numbers. COGS refers to the amount a company pays to produce the goods it sells. Included in this amount is the cost of the labor and materials used to create the product. It leaves out indirect expenses such as sales force and distribution costs.

Say an area shoe manufacturer recorded net sales of $500,000 over the last 12 months. It had outlays of $100,000 for materials and $200,000 for labor, amounting to $300,000 in cost of goods sold. When the percentage gross margin formula is applied, the gross margin percentage is 40%.

  • ($500,000 – $300,000) /$500,000) *100
  • ($200,000/$500,000) *100
  • 0.4*100
  • 40%


For investors, gross margin is a key measure as it allows them to make decisions about an organization without necessarily having to perform a lot of research about them. 

Meanwhile, investors in alternative assets can generally avoid use of the metric, and diversify their portfolio, to boot. Increasingly, they are adding private-market alternative assets — those other than stocks, bonds, or cash — to their holdings.

Due to their low correlation to public markets, alternative assets such as art and real estate are less volatile. Private markets have also performed better than the stock market during every downturn of the last 15 years.

Going through one of the leading alternative investment platforms, Yieldstreet, on which $4 billion has been invested to date, offers the added benefit of scrutiny. While no investment is without risk, Yieldstreet’s offerings go through a rigorous vetting process before reaching the platform. Most potential opportunities do not make it.

Ultimately, investment portfolios that contain a mix of asset types can mitigate overall risk. Diversification can also potentially guard against inflation and potentially improve returns. In fact, it is key to long-term investing success.

Invest in Alternative Assets

Diversify your portfolio with private market investment offerings.

Alternative Assets and Portfolio Diversification 

Alternatives can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially exceptional gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other  alternative investments.

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary 

Gross margin is an essential tool for gauging a company’s financial stability, with higher margins usually indicating better efficiency and profitability. Low numbers could mean the company is experiencing losses on production. In any case, investors can use this knowledge to evaluate investment opportunities more effectively.

Note, though, that when comparing gross margins, it is important for investors to do so within the same industry. For a more holistic view of a company’s financial health, it is advisable to use other metrics as well.

Remember, too, that alternative assets are generally more stable than those correlated with public markets and can provide all-important portfolio diversification.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022


No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Synapse Financial Technologies, Inc. and its affiliates (collectively, “Synapse”) as well as certain third-party financial services partners. Synapse is not a bank and is not affiliated with Yieldstreet. Bank accounts are established by Evolve Bank & Trust. Brokerage accounts and cash management programs are provided through Synapse Brokerage LLC (“Synapse Brokerage”), an SEC-registered broker-dealer and member of FINRA and SIPC. Additional information about Synapse Brokerage can be found on FINRA’s BrokerCheck. By participating in a Synapse cash management program, you acknowledge receipt of and accept Synapse’s Terms of Service, Privacy Policy, and the applicable disclosures and agreements available in Synapse’s Disclosure Library.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure