What is a margin when trading stocks

Profit margins: important balance sheet data for stock valuation

The profits are ultimately decisive for the success of your participation in the stock market - that is, a share.

The sentence is banal, but helps in the long term with the ideal selection.

Hot tips come and go, you can evaluate the profit and the profit margin well.

The balance sheet gives you an insight. You can even easily compare the number within or across industries.

Comparison helps to evaluate

A profit margin of 50% does not help you if the profit margin has decreased or is lower compared to previous years or to competitors. Hence, for you a brief overview of the profit margins and your stock valuation.

Analysts call the profit margin “return on sales”. It simply shows how much profit remains from sales. To do this, you divide the profit by the sales: profit / sales. The trap is in the detail.

Companies can manipulate sales. On the one hand, some companies simply buy additional sales through new company investments.

Then the return on sales drops - this can be intentional in order to hold back dividends. On the other hand, companies can also influence the balance sheet profit. Therefore a comparison is important.

The right profit

It is now common in the analyst scene to use different balance sheet profit items. These are “EBIT” and “EBITDA”.

The abbreviations stand for the English terms: “earnings before interests and taxes” or (“DA”) depreciation and amortization. Both terms stand for depreciation. The “D” for depreciation on property, plant and equipment, the “A” for depreciation on so-called intangible assets.

These can also be patents that German companies are not allowed to write off on their balance sheets. You then relate the Ebitda to sales and have a “better” profit margin. The advantage:

You can use the same calculation scheme to compare national and international companies.

Profit margins: beware of manipulation

Nonetheless, this point of view also opens the door to manipulation. With the depreciation, companies can influence the key figure according to their own taste.

For example, software companies can apply high or low write-downs on programs that have not yet been fully developed (off-balance sheet) in order to structure this number.

Especially in a recession, a global downturn, companies take advantage of this opportunity. It is precisely then that it is important for you to be particularly careful.

Therefore, you orientate yourself on the key figure, but do not make your decisions based on this date alone. Compare:

  • Individual companies within the branch
  • The EBIT figures of the past years and their development. You exclude jumps.

The following industries have particularly high profit margins based on the classic return on sales, which you can determine in the balance sheet:

  • property
  • Partly computer software
  • Raw materials / mines (summer 2011)
  • Telephone companies like Portugal Telecom or China Mobil

The profit margin is a good signal for a stock valuation.

From the balance sheet you can find the “return on sales” - which most public companies also list as “EBIT” or “EBITDA” / sales in the annual report. Above all, pay attention to the historical development in comparison. This normalizes the rating.

In addition to key figures such as the P / E ratio or the price-to-book value ratio, the profit margin or return on sales is one of the most important figures for stocks.

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