What is a company’s profit margin and why is it crucial in 2023’s high-inflation environment?
Nick Sundich, May 4, 2023
In the high inflationary environment we’re in, investors will hear companies talk about margins. What are companies talking about? Why are margins so important? And how can companies maintain them in a high-inflationary environment.
Do you need solid trading & investment ideas on the ASX? Stocks Down Under Concierge can help!
Concierge is a service that gives you timely BUY and SELL alerts on ASX-listed stocks – with price targets, buy ranges, stop loss levels and Sell alerts too. We only send out alerts on very high conviction stocks following substantial due diligence and our stop loss recommendations limit downside risks to individual stocks and maximise total returns.
Concierge is outperforming the market by a significant margin!
GET A 3-MONTH FREE TRIAL TO CONCIERGE TODAY
What is a company’s margin?
A company’s margin, also known as profit margin, is the ratio of net profit to sales revenue. Essentially, it is the percentage of sales that turn into profit.This ratio is used as an indicator of a company’s profitability. A higher margin signifies that the company is maximising its profitability, while a lower margin signals that the company may need to reevaluate its operations and expenses.
For the record, there’s no ‘one-size-fits-all’ yard stick that suggests what is an acceptable margin – although shareholders would think the higher the better. Still, it is not unreasonable to compare companies in the same industry to one another and suggest one company is better than another or to find an industry average and to use that as a yard stick.
Other margins?
There are different types of margins that companies can consider, such as gross margin, operating margin, as well as EBITDA and EBIT margins.
Gross margin is the percentage of revenue that remains after accounting for the cost of goods sold (COGS). Operating margin is the percentage of revenue that remains after accounting for both COGS and operating expenses.
EBITDA and EBIT margins are the percentage of revenues left after when EBITDA and EBIT is considered. Naturally, all these will be higher than the NPAT margin.
Why do margins matter (generally)?
It is important for companies to understand their margins in order to make informed decisions about pricing, expenses, and investments. A low margin may indicate that the company needs to adjust its pricing strategy or cut costs, while a high margin may allow the company to consider expanding its operations or investing in new technologies.
Why are they so important now?
In a high-inflation environment, a company’s profit margin play a crucial role in ensuring the sustainability and profitability of a business. Inflation causes prices to rise and currency to lose its value over time. This means that the cost of goods and services also increases, making it difficult for businesses to maintain their profitability unless they adjust their margins accordingly. They also act as a buffer against rising costs. For example, if a business has a profit margin of 20%, and the cost of producing a product increases by 10%, the business can adjust its price by 10% to maintain the same profit margin.
However, if the profit margin is already low, the business may have to increase its prices significantly, risking losing customers to competitors and ultimately hurting its bottom line. Whichever of those options a company chooses all depends on its competitive position as well as whether or not the company’s good or service is a staple or discretionary – in other words one that consumers can easily sacrifice and maintain a reasonable quality of life.
Inflation can also impact business operations in other ways. For instance, the cost of borrowing money to fund business operations increases in a high-inflation environment. This means that businesses with a low profit margin may find it challenging to access financing for expansion or other activities. Furthermore, high inflation can create uncertainty in the market, making it difficult for businesses to plan for the future. Businesses may have to deal with unpredictable demand, volatile currency exchange rates, and increased competition from domestic and international players.
By maintaining a healthy margin, businesses can increase their resilience to such external shocks and create a cushion to absorb unexpected expenses or losses.
Keep your eye on margins
A company’s margin is a crucial indicator of profitability and financial health. By keeping a close eye on their margins and making strategic decisions, companies can ensure long-term success and growth. A Margin is particularly in a high-inflation environment because they enable businesses to adjust to rising costs and maintain their profitability.
Stocks Down Under Concierge is here to help you pick winning stocks!
The team at Stocks Down Under have been in the markets since the mid-90s and we have gone through many ups and downs. We have written about every sector!
Our Concierge BUY and SELL service picks the best stocks on ASX. We won’t just tell you what to buy – we give you a buy range, price target, a stop loss level in order to maximise total returns and (of course) we tell you when to sell. And we will only recommend very high conviction stocks where substantial due diligence has been conducted.
Our performance is well ahead of the ASX200 and All Ords.
You can try out Concierge for 3 months … for FREE.
GET A 3-MONTH FREE TRIAL TO CONCIERGE TODAY
There’s no credit card needed – the trial expires automatically.
Blog Categories
Get Our Top 5 ASX Stocks for FY25
Recent Posts
So your company announced a non-binding MOU: Is it a genuine deal or desperate puffery?
When you’re invested in a microcap stock, you might hear it has signed a ‘non-binding MOU’ (short for Memorandum of…
How can you build a stock portfolio that delivers good returns? Here are 4 necessary steps
How can you build a stock portfolio that generates good returns and grows your wealth? It’s not easy but it…
If Lithium prices make a comeback, which stocks will be the first to benefit?
The lithium market has been one of the most fraught yet promising sectors in the recent years. The element Lithium…