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One Overlooked Metric That Could Transform Your Company’s Value
You know gross margin impacts your profit, but have you considered the impact it has on the value of your company?
When assessing your company’s value, acquirers and investors will often scrutinize your gross profit margin. Gross profit margin is the difference between a company’s revenue and its cost of goods sold. In other words, it’s the profit a company makes from each unit of product or service sold after accounting for the cost of producing or delivering that unit but does not include other fixed expenses. For example, if a company sells a product for $100 and it costs $70 to produce and deliver it, the gross profit margin would be $30, or 30%.
A high gross profit margin is a crucial factor for investors and potential acquirers as it indicates that a company has established pricing power through marketing differentiation and possesses a competitive advantage. A strong competitive moat is an indicator of a company’s long-term sustainability, making it more appealing to potential investors.
When a company’s gross margin shrinks, it indicates to investors that the company may be competing on price. This is typically a sign that the business lacks a unique value proposition or marketing differentiation and that competing on price is the only way to attract customers. A shallow moat…