How is gross margin used as an indicator of profitability?

Gross margin is a key indicator of profitability as it reveals the percentage of revenue that exceeds the cost of goods sold (COGS). A higher gross margin indicates that a company retains more money from each dollar of sales to cover operating expenses, taxes, and profits. By analyzing gross margin trends over time, businesses can assess their pricing strategies, cost management, and overall financial health. It also enables comparisons with industry benchmarks to evaluate competitive performance.