Profit Margin

• The most important goal for a company is to make money and keep it
•  it determine a company's ability to pay investors a dividend, profitability is reflected in share price.
• Profit Margin - to gain insight into how efficiently a company uses its resources and how much income it generates from operations. 
• How much a company squeezes from it total revenue or total sales? (not measure how much earn from assets. equity or invested capital)
• Margins - earning expressed as a ratio, or percentage
• 3 key profit margin ratios:- gross profit margins, operating profit margins, net profit margin.
• Gross Profit Margin
• Gross Profit Maring = (Revnue - Cost of Goods Sold)/Revenue
• how efficiently management uses labor and supplies in production process.
• Companies with high gross margins will have a lot of money left over to spend on other business operations, such as research and development or marketing 
• When labor and material costs increase rapidly, they are likely to lower gross profit margins - unless, of course, the company can pass these costs onto customers in the form of higher prices. 
• It can vary drastically from business to business and from industry to industry
• Operating Profit Margin
• Operating Profit Margin = EBIT/Revenue
• how successful a company's management has been at generating income from the operation of the business   
•  how much cash the business throws off - a more reliable measure of profitability since it is harder to manipulate with accounting tricks than net earnings. 
• Net Profit Margin
• Net Profit Margin = Net Profit after Tax/Revenue
•  To be comparable from company to company/year to year, net profit after tax must be shown before minority interests have been deducted and equity income added. Investment Income - can change dramatically from year to year.
• High Profit Margin -  it also has one or more advantages over its competition. 
• It have a bigger cushion to protect themselves during the hard time and not easy to get wiped out in a downturn.
• It able capture more market share during the hard times - leaving them even better positioned when things improve again. 
• Margin ratios never offer perfect information - it depend on the timeliness and accuracy of the financial data that gets fed into them, and analyzing them also depends on a consideration of the company's industry and its position in the business cycle. -It highlight companies that are worth further examination.

References:-

• A Look At Corporate Profit Margins kcchongnz (private)