Gross, operating and net margin

Margins express profit as a percentage of revenue, and the three common ones are simply three points on the way down the income statement. Gross margin is revenue less the direct cost of producing the goods or services. Operating margin then subtracts the cost of running the business: sales, administration, research. Net margin subtracts everything else too, including interest and tax.

Reading them together is more informative than any one alone, because the gaps between them locate where the money goes. A company with a strong gross margin and a weak operating margin is spending heavily on overhead or growth; one where operating and net margins diverge sharply is usually paying a great deal of interest, or tax, or both.

Of the three, gross margin is the most structural. It reflects what the company can charge relative to what the product costs to make, which is close to a direct measure of competitive position, and it is the hardest to improve by cutting costs elsewhere.

It is also the most stable, so when it moves the change usually means something: input costs rising faster than prices, discounting to hold volume, or a shift in what the company sells. A gross margin sliding a point a year over five years is a more serious signal than a volatile net margin over the same period.

Net income sits at the bottom of the statement, so everything unusual lands in it: legal settlements, asset sales, writedowns, one-off tax items, currency movements. A single event can double or halve net margin without anything about the underlying business changing.

That makes it the wrong figure to judge a single year on, and the reason margins are worth reading across a decade rather than at a point. The company pages show ten years for exactly this reason: the level in any one year says much less than the shape across all of them.

Banks, insurers and other financial businesses do not report a cost of revenue, because the concept does not apply: their income statement is built around interest, fees, claims and provisions rather than the cost of producing units. A gross margin for such a company is not a low number, it is an absent one, and the tables on this site leave the column out rather than showing zeroes.

That distinction matters when screening. A filter on gross margin silently excludes every financial company, and a sort that treats a missing margin as zero puts them all at the bottom of a ranking they were never part of. Comparing margins is only meaningful within an industry, and for some industries only two of the three exist.