Margin answers a simple question: of every dollar a company sells, how much does it keep as profit? It's the most direct measure of whether a business is profitable or works hard to earn little.
Gross margin and net margin
There are several margins depending on how many costs you subtract from revenue. The two most useful:
- Gross margin = (Revenue − direct cost of goods sold) ÷ Revenue. What's left after paying what it costs to make or buy the product, before all other expenses.
- Net margin = Net profit ÷ Revenue. What's left at the end, after all costs: production, salaries, marketing, interest and taxes.
If a company makes $100 in revenue and keeps $20 in net profit, its net margin is 20%. Gross is always higher than net, because it subtracts fewer things.
What each one tells you
Gross margin reflects pricing power: a high gross margin (60%+) suggests the company can charge well above what it costs to produce, a sign of a strong brand or a hard-to-copy product (software, luxury, pharma). Net margin reflects final profitability, after the whole cost structure: it's what actually ends up in the shareholder's pocket per dollar sold.
Sector context is everything
Don't compare margins across different sectors. A supermarket lives on net margins of 2-3% (it earns little per sale but sells enormous volume), and that's perfectly healthy. A tech company at 25% would be normal. Comparing a supermarket's margin with a software company's makes no sense; what's useful is comparing a company with its direct peers and with its own history.
Watch out for one-off items
A single quarter's net margin can be distorted by one-off events: selling a business, a fine, a tax change. So it's worth looking at several years and being wary of a margin that spikes or collapses suddenly with no explanation in the business.
How to use it
Margin is one piece of profitability, alongside ROE. It measures the quality of the business, not whether it's cheap or expensive (that's the P/E). At StockSemáforo, margins feed the Profitability score. To see any company's net and gross margin instantly, type its ticker into the analyzer.