Gross Margin

Gross margin is revenue minus cost of goods sold, expressed as a percentage of revenue. It is the first and purest profitability signal: before overhead, before financing, does the core act of selling the product make money? Distributors typically run gross margins of 15-30%, manufacturers 25-40%, specialty contractors 15-25% on contract revenue, and service firms much higher. Comparing a customer against its own industry band matters more than the absolute number.

For credit analysis, the trend in gross margin is one of the earliest visible signs of competitive distress. A distributor whose gross margin slides from 24% to 19% over two years is either losing pricing power, chasing volume with discounts, or absorbing cost increases it cannot pass through. Any of those pressures eventually shows up in cash — and in payment behavior toward suppliers — but gross margin shows it first.

In construction, treat reported gross margin with extra care. Percentage-of-completion accounting means margins reflect management's estimates of cost-to-complete on open jobs; systematic underestimation inflates margins until jobs close and the "profit fade" hits all at once. If a contractor's margins on completed jobs run consistently below margins on work in progress, the current statement is flattering itself.