Why Gross Margins Matter

Gross margins is an important thing to listen for on any earnings conference call, Cramer said Thursday, because it is a good predictor of future earnings.

Basically, gross margins are what are left after the cost of sales is subtracted. More specifically, it’s the cost of the goods sold, including the inflation component, labor costs and how much leverage there is (if you have all the labor and costs accounted for, how much business can you do). Of course, there are other costs, too, such as advertising and every company has a different method of reducing these costs to improve gross margins.

A bit of caution, though. Gross margins are uniquely calculated only by listening to the conference call, Cramer said, not by reading the headlines alone.

“If you don’t know the direction of the gross margins, believe me you won’t know the direction of the stocks in your portfolio,” Cramer said. “It is an integral part of the homework and if you don’t calculate it yourself be sure to read from the analysts who do.”

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