Understanding margins

A company with $100 million in operating income sounds impressive, until you learn it came from $10 billion in revenue. That is a 1% margin. Another company earns $50 million in operating income from $100 million in revenue. A 50% margin. The second company is far more profitable, even though it earns less in absolute terms.

This is what margins solve. A margin takes any line from the income statement or cash flow statement and expresses it as a percentage of revenue. The dollar figures disappear and what remains is a single, comparable number.

Why margins matter

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