Margins are most useful when compared like with like. Two comparisons are genuinely informative: a company against its own past, and a company against close competitors in the same industry.
- Against its own history: is the margin stable, rising or falling over several years?
- Against close competitors: is it in line with firms doing similar work?
These comparisons reveal whether pricing power or costs are changing. A slowly falling margin can signal rising competition or cost pressure long before it appears in headlines.
An important caution
Even within an industry, margins can differ for good reasons: a premium brand may earn more on each sale, while a low-cost operator may earn less per sale but sell far more.
| Fictional company | Sector | Net margin |
|---|---|---|
| Nova Industries | Speciality manufacturing | 14% |
| ABC Manufacturing | Bulk commodities | 5% |
Different sectors naturally carry different margins — this is why industry matters.
Margin waterfall
Follow revenue down through every cost to reach net profit, and see each margin form.
The top line
60% gross margin
40% EBITDA margin
30% operating margin
18.8% net margin
Gross margin
60%
EBITDA margin
40%
Operating margin
30%
Net margin
18.8%
Questions to ask
- Has the margin trended up or down over several years?
- How does it compare with close peers?
- Is a change driven by pricing, costs, or a one-off item?
- Is it consistent with the cash the business generates?