Margin

Margin is the ratio of operating profit to turnover. For example, a company with operating profits (trading profit before tax, interest and associates' contribution) of £10m and a turnover of £100m has an operating margin of 10%. Generally speaking, a high margin is a good sign.

For the purpose of calculating margins, REFS defines operating profits as trading profits before tax, interest, other investment income and any share of associated company profits. Capital profits and losses, and other exceptional items, are also eliminated.

A company's operating margin is a vitally important investment statistic that links price-to-sales ratios and price-earnings ratios. Increasing sales are of much less value if margins are falling drastically. If margins are being maintained or are expanding, they quickly translate into increased net profits.

The figure in the key statistics panel gives the operating margin based on the last full year's accounts.

There are a number of caveats to bear in mind when considering margins as an investment measure:-

1. Very high margins invite competition. Unless the barriers to entry are very strong, other
companies will be attracted to the industry. Ideally a company will combine high margins
with products or services that are 'unique' and difficult to emulate; well-patented
products are a good example.
2. Very low margins add to the risk of any investment. A small fall in sales can have a
disproportionate and sometimes disastrous effect on profits. Equally, the slightest
upward movement can have a very beneficial effect.
3. Companies with a history of low margins, in industries that have become used to them,
find it very difficult to increase their margins. Treat with scepticism extravagant claims
about future increases in margin.
4. The significant improvement of margins is usually based upon some kind of product or
service enhancement. Try to identify these from press cuttings or brokers' circulars.
5. Major changes in margins frequently occur as a result of new top management. The
recent record of margins should therefore be looked at in this context.
6. Very choppy margin records usually indicate businesses in industries that are subject to
periodic price wars and/or are very cyclical. Beware of buying into such a company
during a period of very high margins, unless there is very strong evidence that it will
be different this time around.

The columns of moons show the margin relative to the market and the company's sector. A full black moon shows relatively high margins, a half-filled moon average ones and a blank moon relatively low margins.