Long-term investing

Profit margins

Defined in 2 lessons · Updated October 17, 2026

Definition

Gross = (revenue − cost of goods sold) ÷ revenue; operating = operating income ÷ revenue; net = net income ÷ revenue. Rising margins mean more profitable growth.

Example

Say company XYZ has $500 million of revenue, $300 million of cost of goods sold, $75 million of operating income and $50 million of net income. Its gross margin is 40%, its operating margin 15% and its net margin 10%. If next year revenue grows 20% to $600 million and net income reaches $72 million, the net margin rises to 12%, so profit grew faster than sales.

Hypothetical numbers, for illustration only.

Two panels of quarterly EPS growth bars labeled Q1 to Q4: on the left, accelerating, with +10%, +20%, +35% and +50%; on the right, decelerating, with +50%, +35%, +20% and +10%.

Also defined in

Growth vs Value Stocks: Key Differences and How to Mix Them→ The ratios behind the labels, and how to compute them

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