Gross margin

Gross margin captures the percentage of each revenue dollar that survives after the direct costs of producing the product or service. It is the cleanest lens on unit economics: a software business with 80% gross margins has fundamentally different operating leverage than an industrial distributor at 20% gross margins, and the gap explains most of the multiple difference between them. Gross margin trends are even more informative than levels. Rising gross margins typically signal pricing power, mix shift toward higher-value products, or scale benefits in production; falling gross margins signal competitive pressure, input-cost inflation, or unit-economics deterioration that no amount of operating-expense leverage can fully offset. We watch gross margin trajectory as a leading indicator of moat durability — a business whose gross margins erode steadily is one whose competitive position is deteriorating, regardless of what the operating-margin line says in any single year.