Lesson 03 — Profit Margins: Gross, Operating, Net
Week 04 · Lesson 3 of 5 · Week 04 — Reading a Profit & Loss Statement
A company earning ₹100 Cr profit sounds great. But is it from ₹500 Cr revenue (20% margin) or ₹10,000 Cr revenue (1% margin)? Context matters. "Margin batata...
Why margins matter more than absolute profit
A company earning ₹100 Cr profit sounds great. But is it from ₹500 Cr revenue (20% margin) or ₹10,000 Cr revenue (1% margin)? Context matters.
🗣️
"Margin batata hai ki company kitni efficiently paisa kamati hai."
The three key margins
1. Gross Margin
Gross Margin = (Revenue - COGS) / Revenue × 100
Tells you: how much is left after direct production costs.
- IT companies: 60-70% (low material cost)
- Steel companies: 15-25% (high raw material cost)
2. Operating Margin (EBITDA Margin)
EBITDA Margin = EBITDA / Revenue × 100
Tells you: how much is left after ALL operating costs (before depreciation, interest, tax).
- Good rule of thumb: > 15% for non-financial companies
3. Net Profit Margin (PAT Margin)
Net Margin = PAT / Revenue × 100
Tells you: what percentage of every rupee of revenue becomes actual profit.
Comparing margins across sectors
| Sector | Typical Net Margin |
|---|---|
| IT Services | 18-25% |
| FMCG | 12-18% |
| Banking (NIM proxy) | 3-4% |
| Auto | 5-10% |
| Pharma | 12-20% |
| Steel/Metals | 5-15% (cyclical) |
Compare within sector
Don't compare IT margins with steel margins. Compare TCS with Infosys, or Tata Steel with JSW Steel.
What to watch for
- Expanding margins → company becoming more efficient (bullish)
- Shrinking margins → costs growing faster than revenue (bearish)
- Sudden margin spike → check if it's one-time (asset sale, tax benefit)
Key takeaway
Margins tell you about business quality. Great businesses have high and stable margins over time.