Understanding Profit Margins
A 1-minute lesson from the MarketPro academy, one of 24 in fundamental analysis.
Profit margins measure how much of a company's revenue is retained as profit at different stages of the income statement, and comparing margins over time or against peers is a common way to judge operating efficiency. Margins vary enormously between industries: software businesses often carry high gross margins because production costs are low relative to price, while retailers or manufacturers typically operate on thinner margins due to higher direct costs.
Profit margins measure how much of a company's revenue is retained as profit at different stages of the income statement, and comparing margins over time or against peers is a common way to judge operating efficiency.
- Gross margin: revenue minus cost of goods sold, divided by revenue — reflects how efficiently a company produces what it sells.
- Operating margin: profit after operating expenses, divided by revenue — captures how well the core business is run day to day.
- Net margin: final profit after all expenses, interest, and taxes, divided by revenue — the broadest measure of overall profitability.
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Lesson 12 of 24 in Fundamental analysis
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