Key Fundamentals: Sales, Margins, Return On Equity(6)

Profit Margins: Another Way To Assess Earnings Performance(1)

Profit margins are the portion of a company's sales that end up as earnings.

As an investor, look for companies that generate an increasing percentage of profit out of every dollar of sales.

The larger the margin, the better a company is at managing and leveraging its business.


Studies of the greatest winning stocks revealed that most showed strong and even expanding profit margins before they made huge price moves.

The best small and midcap stocks of the 1996-97 period had after-tax profit margins, on average, of 10% in the two quarters right before they made their main price gains.

For big-capitalization stocks, the margins were 13%.

Profit margins can be a major clue in finding the best stocks to buy, although the numbers vary widely among industries.

For example, retailers tend to have smaller profit margins.

Whatever the exact numbers, a company's margins should be among the best in its industry.