A company has good gross margin when it is competitive with its industry peers and remains stable in the long-term, according to Investopedia. Profit margins vary greatly from industry-to-industry. For example, the airline industry averages 5 percent, while the software industry averages 90 percent.
Gross profit margin is the proportion of money left over after subtracting the cost of goods sold from revenues. Gross margin is a company's best resource for meeting additional expenses and retaining earnings. It is calculated by subtracting the cost of goods and services from revenue and dividing that figure by revenue. For example, if Company A has $100,000 in revenue and $50,000 in COGS, its gross profit margin is 50 percent. Gross profit margin is used by investors and stock analysts to compare companies in the same industry, notes Investopedia.
Companies with high profit margins are considered superior investments because they build equity faster, have more capital to expand operations and are better prepared to weather a downturn than a low profit margin company, which could be wiped out in a recession, explains Investopedia. Gross profit margin is also used to test the growth and validity of a particular product or service. This factor is important because an item can generate a large volume of sales but not be a viable or competitive investment option because of low profit margins.