Gross margin is the first place a business's competitive advantage — or lack of it — shows up in the financial statements. Before management incentives, accounting choices, and operating leverage effects distort the picture, gross margin reveals whether a company has pricing power over its customers, cost advantage over its suppliers, or neither. For stock screeners, it is one of the most powerful single-metric quality filters available.
Last updated: June 2026.
What gross margin measures
Gross Margin = (Revenue − Cost of Goods Sold) ÷ Revenue
Or equivalently: Gross Profit ÷ Revenue
Cost of goods sold (COGS) includes the direct costs of producing what the company sells: raw materials, direct labour, manufacturing overhead, and (for retailers) the wholesale cost of inventory. It excludes sales, marketing, R&D, and general and administrative costs.
A company with €100M in revenue and €40M in COGS has €60M gross profit and a 60% gross margin.
Why gross margin reveals competitive position
High gross margins indicate one or more of:
Pricing power: The company can charge significantly more than its direct production cost — because its product is differentiated, has switching costs, or has no direct substitute. Hermès, ASML, and SAP have pricing power; commodity producers and generic retailers don't.
Supply chain advantage: The company has lower input costs than competitors — either through scale, long-term contracts, vertical integration, or proprietary processes. Coca-Cola's sugar sourcing is not differentiated; its brand allows it to charge 10x the cost of inputs.
Scalable product model: Software companies can deliver additional units at near-zero marginal cost once the product is built. A SaaS company with 80% gross margins earns €80 from every €100 of new revenue to apply toward R&D, sales, and profit — giving it enormous flexibility to invest in growth.
Brand or IP protection: A pharmaceutical company with a patented drug can price it far above generic equivalents. A branded consumer goods company charges for the brand itself, not just the physical product.
Gross margin by sector: what to expect in Europe
| Sector | Typical gross margin range | What explains it |
|---|---|---|
| Software / SaaS | 65–85% | Near-zero marginal delivery cost |
| Pharmaceutical (innovative) | 60–80% | Patent protection, inelastic demand |
| Medical devices | 50–70% | Proprietary technology, switching costs |
| Luxury goods | 55–75% | Brand pricing power |
| Consumer staples (branded) | 35–55% | Brand + distribution leverage |
| Industrial automation | 35–55% | IP + service aftermarket |
| Specialty chemicals | 30–50% | Proprietary formulations |
| General industrials | 20–40% | Commoditised competition |
| Retail (branded) | 35–50% | Merchandise mix dependent |
| Food & beverage | 20–40% | Input cost pass-through limitations |
| Retail (discount/commodity) | 5–20% | Volume-driven, minimal differentiation |
| Oil & gas E&P | 20–40% | Commodity price dependent |
| Construction | 5–15% | Competitive bidding, project risk |
How to use gross margin as a screening filter
As a quality gate
Apply a minimum gross margin filter to remove commodity businesses and undifferentiated producers from a candidate list before applying valuation filters.
Practical thresholds:
- > 40%: Suggests some degree of product differentiation or brand value
- > 50%: Good signal of genuine pricing power or IP protection
- > 60%: Strong competitive moat; typically software, pharma, or luxury
A European quality screen starting with gross margin > 50% immediately filters the universe to businesses with structural competitive advantages — before you even look at valuation.
As a trend indicator
Expanding gross margin over 3–5 years signals improving competitive position: either pricing power increasing, input costs declining, or revenue mix shifting toward higher-value products. This is often an early signal of quality improvement.
Compressing gross margin warns of the opposite: pricing pressure, cost inflation, or product commoditisation. A company whose gross margin has declined from 60% to 45% over five years is telling you something important about its competitive position.
In combination with operating margin
The gap between gross margin and operating margin is consumed by operating expenses: sales and marketing, R&D, G&A. This gap reveals investment intensity.
Gross margin 70%, operating margin 25%: The company invests 45% of revenue in operating costs — typical for a growing SaaS company investing in sales and R&D.
Gross margin 60%, operating margin 55%: The company operates with extreme efficiency — minimal marketing spend, lean G&A, no R&D. Typical for a mature business with captive customers (accounting software at renewal, for instance).
Gross margin 30%, operating margin 15%: Normal for a stable industrial business. Not a screener red flag — just a different business model.
High gross margin European companies by sector
Software and technology
SAP (Germany): 70%+ gross margins from enterprise software licensing and cloud subscriptions. The dominant ERP system creates extraordinary lock-in.
NICE Systems / Dassault Systèmes: 70%+ gross margins on specialised software for aerospace, automotive, and industrial design.
Temenos (Switzerland): Core banking software with 65%+ gross margins and highly contractual revenue.
Pharmaceuticals
Novo Nordisk (Denmark): 80%+ product gross margins on GLP-1 drugs. Patent-protected products with near-monopoly market positioning.
Roche (Switzerland): 70%+ gross margins across diagnostics and pharma. Proprietary assays and patented drugs drive exceptional unit economics.
UCB (Belgium): Neurology drugs with 70%+ gross margins from specialised molecules with limited generic competition.
Medical devices
Coloplast (Denmark): 60%+ gross margins on ostomy and urology products. Single-use consumables with high patient switching costs (changing device brands is medically disruptive).
Carl Zeiss Meditec (Germany): Ophthalmic surgical equipment with 55%+ gross margins, supplemented by high-margin service contracts.
Luxury and branded consumer
LVMH (France): 67%+ group gross margins, with flagship brands like Louis Vuitton estimated above 70%.
Hermès (France): 70%+ gross margins on leather goods, silk, and accessories. Pricing power is among the strongest of any consumer business.
Ferrari (Italy): 55%+ gross margins at production volumes of 15,000 cars per year — extraordinary for automotive manufacturing.
The gross margin + ROIC combination
The most powerful quality screen combines gross margin with ROIC (Return on Invested Capital):
High gross margin + high ROIC = capital-efficient pricing power. The business generates exceptional margins and doesn't need much capital to sustain or grow them. Examples: SAP, Hermès, Coloplast.
High gross margin + low ROIC = margins eaten by capital requirements or excessive reinvestment. A pharmaceutical company with 70% gross margins but 8% ROIC is investing heavily in manufacturing capacity, trials, or acquisitions. May improve as investments mature, or may signal chronic capital misallocation.
Low gross margin + high ROIC = volume efficiency. Possible for businesses with extreme asset turnover (fast-fashion retail, discount distribution). Fragile — competitive pricing pressure can eliminate margins quickly.
Quality combined screen
| Filter | Value |
|---|---|
| Gross margin | > 50% |
| ROIC | > 15% |
| Operating margin | > 15% |
| Revenue growth (3yr) | > 5% |
| Net Debt/EBITDA | < 2.0 |
| Market cap | > €500M |
| Sort by | Gross margin descending |
Common mistakes when screening by gross margin
Ignoring sector context: A 25% gross margin in specialty chemicals is excellent; 25% in software is a red flag. Always compare gross margins to sector averages, not to an absolute benchmark.
Confusing gross margin with operating margin: A company can have a 70% gross margin and a 5% operating margin if it spends heavily on sales and R&D. The gross margin reveals product unit economics; operating margin reveals the profitability of the complete business.
Not tracking the trend: A current gross margin of 55% is meaningless without knowing whether it was 45% three years ago (improving — positive signal) or 65% three years ago (compressing — negative signal). Trend analysis requires time-series data, which most screeners provide through historical comparisons.
Applying it to financial companies: Gross margin is not a meaningful metric for banks, insurance companies, or other financial sector firms. Their revenue and cost structure is fundamentally different. Use sector-appropriate metrics (P/B, ROE, NIM) for financials.
Bottom line
Gross margin is the single most informative metric about business quality available in a stock screener. It is also one of the least discussed — most investors focus on P/E, EV/EBITDA, and dividend yield while ignoring the metric that most directly measures whether a company has a durable competitive advantage.
The practical approach: use gross margin above 40–50% as a first-pass quality gate. Then apply ROIC to confirm that the margins are translating into capital-efficient returns. Then add valuation filters to find pricing that doesn't fully reflect the quality. The result is a candidate list weighted toward businesses with genuine competitive moats.
Frequently asked questions
What is considered a good gross margin for European stocks?
"Good" is sector-relative. For software and pharma, above 60% is standard; below 50% warrants investigation. For consumer goods, 35–55% is normal. For industrials, 20–40% is typical. As a cross-sector quality gate, gross margin above 40–50% indicates some degree of product differentiation or pricing power in most industries.
Can a company have high gross margin and still lose money?
Yes — and this is common in high-growth companies. A software company with 75% gross margins and €100M revenue can have negative operating income if it spends €50M on sales and marketing and €40M on R&D. The high gross margin tells you the unit economics are excellent; the operating losses tell you the company is choosing to invest rather than harvest profits today. Many of the most successful software companies were unprofitable for years despite excellent gross margins.
Does gross margin improve over time for good businesses?
For quality businesses, gross margins tend to be stable or slightly improving over time — reflecting gradual pricing increases and operating scale benefits on cost of goods sold. Rapidly expanding gross margins can signal a positive mix shift (more higher-value products) or successful premium pricing. Declining gross margins typically indicate competitive pressure, input cost inflation that cannot be passed through, or a deteriorating product mix. Tracking 5-year gross margin trends is one of the most useful screens for competitive position assessment.
Is gross margin available in European stock screeners?
Yes — gross margin is a standard field in most fundamental stock screeners covering European markets. Some screeners label it "gross profit margin" or show gross profit as a line item rather than a percentage — ensure you're using the percentage (gross profit ÷ revenue) rather than the absolute gross profit figure when making cross-company comparisons.
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