Understanding the financials of a company is super important in investing, to help you understand the fundamental financials, we compiled four margin metrics that you should be using.
These metrics will help you determine the current and long-term profitability of a company.
Gross Profit Margin
Gross Profit Margin is a ratio to help determine the percentage of sales revenue a company keeps after covering all direct costs associated with running the business.
A high gross margin means the company retains a large portion of their sales revenue generated. This is because the company has low production costs.
Think software vs. manufacturing
Operating Margin calculates the profit in which a company generates, per dollar of sales (after paying for variable costs). These costs include research and development, sales, and administration.
Net Profit Margin
Net Profit margin, better known as Net Margin, is used to measure the profit a company generates, as a percentage of revenue. It is used to see how well a company turns its top line revenue to its bottom line net income.
Free Cash Flow Margin
Free Cash Flow is known as the ultimate measure of a company, as it includes capital expenditures.
Free Cash Flow Margin is used to measure how well a company turns its top line revenue into free cash flow.