Course 305: Quantifying Competitive Advantages
Profit Margins
In this course
1 Introduction
2 Free Cash Flow
3 Profit Margins
4 Turnover
5 Return on Equity and Assets
6 DuPont Equation
7 Margin vs. Turnover
8 DuPont and ROE
9 Return on Invested Capital
10 The Bottom Line

Remember that there are three main types of profit margins we can measure: gross, operating, and net. These three look at gross profit, operating profit, and net income as a percentage of sales. In a nutshell, margins tell you how much of each type of profit a company is generating per dollar of sales.

It should make sense that companies with economic moats generally have larger profit margins than their competitors. Wal-Mart (WMT) may sell an apple at the same price as a local grocery store. But if Wal-Mart's costs are lower, its profit margins on the sale of the apple will be higher. Likewise, it may cost the same for Harley-Davidson (HOG) and one of its competitors to build a motorcycle, but Harley should be able to sell its bike at a higher price because of its brand. Harley will have the higher profit margin.

A net margin consistently in excess of 15% is a good benchmark that often indicates a company has sustainable competitive advantages. Do keep in mind, however, that margins by themselves are of limited use; you also have to consider the context of turnover and return, which we will discuss shortly.

Next: Turnover >>

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