COGS and Gross Profit
After revenue, the next line is the direct cost of what was sold - raw materials, components, packaging, freight. This is called Cost of Goods Sold (COGS) or "Cost of materials" in Indian filings.
The formula
Gross profit = Revenue − COGS
Gross margin (%) = Gross profit ÷ RevenueA bottling company that sells ₹100 of soda and spent ₹40 on sugar, bottles, and packaging has ₹60 gross profit and a 60% gross margin.
Why this margin matters
Gross margin is the purest profitability signal a business has. Everything below the gross-profit line (salaries, rent, marketing) is at least partially controllable. The cost of raw materials usually is not - it's set by commodity markets.
A widening gross margin means one of three things:
- Pricing power - customers accept higher prices without leaving
- Operating leverage on materials - better sourcing, scale discounts, vertical integration
- Mix shift - selling more of the high-margin products and less of the low-margin ones