Gross, Operating & Net Margins
Overview
Profit margins measure how much of each dollar of revenue a company keeps as profit at different stages of the income statement, making them essential tools for stock comparison. Gross margin reveals production efficiency, operating margin shows core business profitability, and net margin captures the bottom-line result after all expenses. Tracking margin trends over time is a key technique in earnings valuation analysis, because expanding margins often foreshadow positive earnings surprises. Use our stock screener to rank companies by margin metrics and spot expanding-margin compounders before the market catches on.
Key Takeaways
- Gross margin = (Revenue - COGS) / Revenue — measures production efficiency.
- Operating margin = Operating Income / Revenue — measures core business profitability.
- Net margin = Net Income / Revenue — the bottom-line efficiency metric.
- Expanding margins over time suggest pricing power and operating leverage.
Practical Tips
- Software companies have 70-80% gross margins; retailers may have 25-35%.
- Improving operating margin with stable revenue growth is a strong bullish signal.
- Watch for margin compression — it often precedes earnings downgrades.
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