What are Gross Margins? Gross Margins are total revenues less the cost of goods or services produced divided by total revenue and is expressed as a percentage. This is the percentage of gross profits a firm earns after cost of goods are deducted. A firm will strive to control cost of goods with economies of scale as well as cost containment measures. Gross profits and gross margins are the same and are interchangeable. However, they are expressed differently. Gross profits are the whole number of revenues less costs of goods whereas gross margins are revenues less costs of goods, the difference of which is then divided by total revenues.
Gross margins can be used by management in various ways to determine what kind of deduction a firm may employ to promote a product. For instance, if gross margins are approximately 65% then
Many firms use varying methods to determine total revenue as well as cost of goods sold. Therefore, while the principles are the same from one firm to another, when one company outperforms another firm in this metric, it is the beginning of that company separating them and being more profitable in general. Learn even more and follow along with Stock Market For Beginners – How to Invest in Stocks where I show how these metrics are some of the most important to understand.
Gross Margins & Cannabis Stocks
If you wanted to analyze gross margins of all the firms on the Complete List of Cannabis Stocks, you would see that the better performing cannabis stocks are hitting approximately 60% – 65% gross profits relative total revenue.
For instance, in its latest financial release, you can see above with Columbia Care CCHWF stock these data points:
- Total Revenue: $139.4M
- Cost of Goods Sold: $111.7M
- Gross Profits: $27.6M
- Gross Margins: 19.7%
Whereas Columbia Care saw significant increases in revenue for its quarter, it also saw a large increase in cost of goods sold. The translated into a move lower in gross margins from the previous quarter’s 55.5% to the current 19.7%. Columbia Care Q4, 2021
The Best Cannabis Stocks
What are the Best Cannabis Stocks and, what should you be looking for to help determine what the best cannabis stocks are? The cannabis industry is expanding rapidly as prohibition is ending. Firms are working diligently to create a large foundation to connect with consumers.
During this process, generating revenue from the infrastructure any one company has created is a major goal. But, generating revenue in itself is not enough: Firms must be profitable. The first measure of profitability we look for with financial statements is gross profits. The relative percentage of gross profits to gross revenues gives us the first profit metric to compare firms. This is gross margins.
And, if you continually want to grow your knowledge on understanding how to buy stocks using Value Investing principles, make certain to sign up for the complete Value Investing Video Course Series where I break down how to use these principles.
What to look for with Gross Margins & Cannabis Stocks
As firms increase their respective foundation in areas where there previously was no cannabis sales, look for ever-increasing revenue gains. And, look for cost of goods sold to be contained in a way where firms can optimize their profits and achieve the highest level of gross profits.
Gross Margins in the range of 60% – 65% are where some of the best firms are printing their gross margins.