Interpreting the financial statements can tell us about the company's operations and the dynamics of its future operations, so reading the financial statements can identify the intrinsic value of the company。And most investors are most concerned about the results of the "three rates" in the financial report: gross margin, operating margin, net margin.。

What is gross margin？

Gross margin (Gross Margin) is the amount of revenue remaining after deducting expenses (cost of goods sold, COGS) incurred in selling products or services to customers.。Gross margin is an indicator that helps investors view the relationship between a company's revenue and costs, thereby assessing the company's ability to control costs in production.。

Generally speaking, representatives of enterprises with high gross margins have strong competitiveness, perhaps with unique products, key technologies, or good cost control capabilities;。

Numerical Implications of Gross Margin

In addition to being a measure of profitability and cost control, gross margin is also an indicator that can be used to measure the competitiveness of an industry.。

In general, companies with high gross margins usually have unique profit points and competitive advantages in their products or services and are able to avoid competitive price cuts with their peers.。

Companies with low gross margins, on the other hand, usually have more competitors in the same industry and are prone to price-cutting competition with each other, resulting in lower gross margins.。If there is another cooling of the business climate, the impact on the business will be even greater.。

As a result, the premise that a company's profits want to be able to grow sustainably, in addition to revenue to be able to grow, the ability to grow gross margins also plays a very important role.。Companies with continued growth in monetary income, coupled with good cost control, are the twin engines of increased profitability。

The relationship between gross margin, operating profit ratio, and net profit margin

The real profit of an enterprise comes from the sales of products or services generated by the operating income, after deducting the cost of manufacturing, personnel management, out-of-business income and expenditure, and income tax, the last remaining is net profit, that is, the real money in the pocket.。

Operating income minus operating costs, the rest is operating margin; operating margin minus operating expenses, the rest is operating profit; operating profit plus out-of-business income and expenditure, that is, net profit before tax.。What remains after the final tax deduction is the net profit after tax.。

Indicator 1: Gross Margin Gross Margin

The profit of the enterprise comes from the operating income, after deducting all costs and taxes is the net profit.。Therefore, when a company's revenue and gross profit continue to improve, it will naturally have the opportunity to enhance business interests and further improve net profit.。

Indicator 2: Operating Margin

The operating profit rate, also known as the profit rate, is an index to examine the business ability of the enterprise, and the value represents the amount of money the enterprise makes.。

In other words, the higher the operating profit rate, the better the management and sales ability of the enterprise, the stronger the earning power of the industry;。

Indicator 3: Net Profit Margin

Both gross margin and operating profit ratio are used to examine the status of the industry, while the net profit margin is to further consider the profit and loss of out-of-business income and expenditure, to avoid the industry's good performance but out-of-business losses of enterprises.。

Net profit before tax is an indicator that takes into account out-of-business gains and losses, which is the result of operating benefits plus out-of-business income or after deducting out-of-business expenses, such as transfer income, sale of land or financial assets, etc.。

The net profit after tax is the result of deducting income tax, that is, the company sells the product or service, the final profit.。

Therefore, if a company wants to improve profitability, in addition to revenue needs to continue to grow, while gross margin, operating profit ratio can improve is also critical.。This industry's earnings improvement is a long-term solution for the company, and if it can continue to make money outside the industry, then the company's earnings should be considerable.。

What to pay attention to when investing？

Most investors in the selection of stocks, often too much emphasis on the growth of revenue, but ignore the gross margin of this indicator, see the significant growth of revenue as a basis for buying, easy to fall into the dilemma of buying on the trap。

So when selecting stocks, in addition to revenue growth, whether gross margins can improve is also a factor affecting corporate earnings。The following two principles can be used when looking at gross margins.

• Comparison with past gross margins
• Comparison with the same industry

SUMMARY

Through the gross margin of this indicator, can let investors view the profitability of enterprises and the ability of cost control, corporate earnings to continue to grow, in addition to revenue to be able to improve, gross margin improvement, optimization is also very important.。A further review of metrics such as operating margin and net profit margin is needed to understand whether the business is actually making money。