by CI Staff
A company’s stock price, in large part, is driven by the company’s ability to generate earnings. Therefore, it is useful for investors to analyze the profitability of a company before investing in it. One way to do this is by calculating and tracking various profit margins, which reflect how efficiently a company uses its resources.
Profit margins are expressed as a ratio, specifically “earnings” as a percentage of sales. By expressing margins as a percentage, we are able to compare the profitability of different companies more easily. Margins allow investors to judge, over time, management’s ability to manage costs and expenses and to generate profits. Management’s success or failure determines the company’s profitability. Strong sales growth is meaningless if management allows costs and expenses to grow disproportionately.
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