A company racks up high gross margins either because it has no serious competition, or because it has figured out how to manufacture its products cheaper than the competition can. Competitive pressures forced margins down to 64 percent by Cisco's July 2000 quarter, and to 63.5 percent in its October quarter. While declining gross margins sometimes signal industrywide problems, they usually quantify the existence of intensifying competition-and competition, once established, seldom goes away. Comparing Cisco's October 2000 quarter's gross margins of 63.5 percent to the year-before 64.6 percent figure would have alerted you to Cisco's deteriorating competitive position. By contrast, Juniper Networks' gross margin increased from 59.5 percent in the fourth quarter 1999 to 65.7 percent one year later.
Gross margins vary from company to company and from industry to industry.
Gross margins fuel bottom-line earnings, and declining margins usually lead to earnings disappointments. Analyzing accounts receivable Companies selling products to other companies give their customers a specified time, say 60 days, to pay for the goods. Money owed to a firm by its customers for goods received, but not yet paid, are called accounts receivable . The receivables level typically follows sales, so that if sales double, receivables double. The receivables rate decreases if the company gets better at collecting from customers, and that helps its cash flow.