Margins & Profitability

How efficiently a company turns sales into profit and cash.

1. Gross Margin in Depth — Gross margin shows how much of each sales dollar is left after paying for the product itself. It is one of the clearest clues to a company’s pricing power. Here is how to calculate it, what counts as high or low and why it varies so much by industry.
2. Operating Leverage — When a company has high fixed costs, a rise in sales can make profits jump much faster than revenue. That is operating leverage, and it works in reverse too. Here is how it works with simple numbers and a real example.
3. Net Margin & One-Time Items — Net margin is the share of revenue left after every expense, including interest and taxes. But one-time gains and charges can distort it. Here is how to read net margin and spot when a single event is flattering or hurting the numbers.
4. Return on Equity & Capital — Return on equity and return on invested capital show how much profit a company squeezes out of the money invested in it. They help separate truly great businesses from merely big ones. Here is what they measure and the traps to avoid.
5. Free Cash Flow Margin — Profits are an accounting figure; cash is what actually pays for dividends, buybacks and growth. Free cash flow margin shows how much real cash a company keeps from each sales dollar after investing in its business.
6. Comparing Profitability Across Peers — A 5% margin can be excellent in one industry and terrible in another. The fair test is to compare a company with its direct competitors. Here is how to line up peers and what the differences tell you.