Gross Profit Margin
Gross profit margin is my another favorite figure that I look for before I invest in a company. Gross profit can be obtained by subtracting raw material or cost of sales from revenue. From the gross profit we divide it with revenue, then we get gross profit margin.
Based on the revenue, cost of sales and gross profit figure, we can find the gross profit margin by dividing gross profit by revenue and get the percentage of it.
Higher profit margin tell us that that the company is having competitive advantage which mean the products of company are unique and have certain royal buyers. The company can transfer the price hike of raw material to consumer easily.
Unlike the company with low profit margin, there are too many similar products in the market. Each competitors tend to lower the price of products to attract buyers. In the end, the company earn not much or even fell into deficit with low profit margin. Another thing to mention, when the raw material needed rise due to uncertain economy, those company with low profit margin definitely will go into deficit. Better stay away these kind of company.
Therefore, I tend to look for high profit margin stocks which can absorb the shock during the turbulence market. The competitive advantage company can pass the rising raw material risk to consumer without affecting its earning.
