{"id":2259,"date":"2008-07-29T04:09:14","date_gmt":"2008-07-29T09:09:14","guid":{"rendered":"http:\/\/magic1host.com\/blog\/2008\/07\/29\/warren-buffett-the-importance-of-profit-margins\/"},"modified":"2008-07-29T04:09:14","modified_gmt":"2008-07-29T09:09:14","slug":"warren-buffett-the-importance-of-profit-margins","status":"publish","type":"post","link":"https:\/\/magic1host.com\/blog\/?p=2259","title":{"rendered":"Warren Buffett & The Importance of Profit Margins"},"content":{"rendered":"
by Martin Sejas<\/div>\n

Profit margin is the theme of this final article in the series about Value Investing which is a concept that is commonly underutilised in finance today. Nevertheless, profit margin is something that all investors tend to look at when decide which stocks to invest in. The reasons behind must be understood.<\/p>\n

However, before I can explain the reasons, it’s important to define the term profit margin given that many people are still bewildered by its meaning. Simply put, it is the percentage of net sales that becomes net income after subtracting expenses which includes tax.<\/p>\n

Therefore, a high profit margin means that the company is controlling its costs very well, which is what investors all look for. On the other hand, a low profit margin indicates a low margin of safety meaning that a decline in sales could quickly erase profits and result in a net loss.<\/p>\n

Now, that all may seem pretty simple to understand, which is true. It’s not difficult to see how profit margins can be useful in determining which companies to invest in. However, Warren Buffett uses profit margins in a different way to the typical investor and this is why his fortunes have not been necessarily typical.<\/p>\n

Historical profit margins are the key behind the success Buffett has enjoyed. This basically means that you have to analyse the evolution of profit margins of a company to give you a good idea of the state of the company. During this analysis, 3 types of patterns can be observed and it’s important to understand the meaning of each one.<\/p>\n

The first type of pattern is a consistent profit margin. This basically means that in the last 5 years (or whatever number of years you choose to use) the profit margin has remained relatively stable. This is good news<\/a> if the profit margin is high means that management has successfully been able to control any growth in expenses. However, it is bad news for any investor if this is low.<\/p>\n

The second type of pattern is an increasing profit margin. This basically means that in your chosen period, the profit margin has steadily increased. This is great news for a budding investor, however, before choosing to invest in such a company, it’s recommended that you completely understand the other components of Buffett’s methodology before making a decision which are explained in my previous articles<\/a>.<\/p>\n

A final common pattern is that of a decreasing profit margin over the time period chosen. This is evidently bad news for any investor and it is highly recommended that investors stay away from companies which have this characteristic. Nevertheless, it would be premature to say that such a company is not worth investing in without looking at other parts of the Buffett methodology.<\/p>\n

In conclusion, the methodology used successfully by Buffett is something that all investors should study, all of which are outlined in this article and the preceding articles. One would be crazy to not learn something from the richest<\/a> man in the world. However, there are many other strategies out there which have been successful. Watch this space for many more great articles on stock trading strategies.<\/p>\n

\n
About the Author:<\/div>\n
About the author: Martin Sejas is the owner<\/a> of Stocks-And-Commodities.com, an influential stocks trading<\/a> website dedicated to finding the best and the latest strategies and techniques for stocks and commodities<\/a> trading. Its mission is to become the ‘one-stop shop’ on the best stocks trading websites and programs on the World Wide Web.<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Profit margin is the theme of this final article in the series about Value Investing which is a concept that is commonly underutilised in finance today. Nevertheless, profit margin is something that all investors tend to look at when decide which stocks to invest in. The reasons behind must be understood.<\/p>\n","protected":false},"author":1133,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[77],"class_list":["post-2259","post","type-post","status-publish","format-standard","hentry","category-business","tag-business"],"_links":{"self":[{"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/2259","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=\/wp\/v2\/users\/1133"}],"replies":[{"embeddable":true,"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2259"}],"version-history":[{"count":0,"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/2259\/revisions"}],"wp:attachment":[{"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2259"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2259"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2259"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}