7 ms·
Operating Margins
- soontimes 11mo agoI like your style - clear, on point, and no attempts to sell me anything. It’s honestly refreshing to read
- i_am_a_peasant 11mo ago++1
- NebulaStorm456 11mo agoThere is another aspect to this, "Can the margins scale?" https://www.bloomberg.com/opinion/newsletters/2025-11-13/blackstone-is-for-everyone https://www.bloomberg.com/opinion/newsletters/2025-11-13/bla...
- cies 11mo agohttps://archive.is/EdxHn https://archive.is/EdxHn interesting read.
- fi-le 11mo agoThank you for the kind words.
- deleted 11mo ago[deleted]
- tekne 11mo agoThis is an excellent article, but the graph is unreadable on mobile even with a relatively large screen.
- forgetfulness 11mo agoI did like famous visionary CEO Steve Jobs used to advice, and it read well enough I held my phone sideways
- deleted 11mo ago[deleted]
- kqr 11mo agoFor the benefit of you and other small viewport users, here's an image of the plot, with a line indicating where the median is the same as the mean. https://i.xkqr.org/medianvsmeanmargin.png https://i.xkqr.org/medianvsmeanmargin.png Though I do recommend exploring the plot on a full-size monitor too – it's zoomable etc.
- achairapart 11mo agoAlso, at the end of the article: > Appendix > The by-category margins are repeated in this table. It's basically the same data in a more mobile-friendly table.
- kqr 11mo ago> Divide a company's income by its revenue If I'm a person who believes income is the same thing as revenue, how would you explain this division to me in a way I'd understand? Or does "income" in this case mean "profit"?
- phrygian 11mo agoThe operative word should have been ‘operating’ income, which is revenue - operating expenses - cost of goods sold
- unmole 11mo agoThe next line makes it clear: > For some volume of sales that comes into the business, it gives an idea of what percentage is left as cash in the end.
- sokoloff 11mo agoIncome is closer to profit than you're thinking. There is gross income, which is roughly sales (revenue) minus the direct costs of those sales. There is net income, which is the money left over after also accounting for other costs, like fixed overheads and marketing.
- cies 11mo agoI stumbled over this sentence in the same way. And drew the same conclusion: the author uses "income" to mean "profit"
- sokoloff 11mo agoThat is the standard meaning of that term in business accounting. When you or I work for a salary, we think of income as all the money coming in, but that's because there are no allowable expenses that we get to deduct against that income, so our "revenue as employees" is all "income".
- arethuza 11mo agoI think "income" is the standard accounting term in the US - in the UK the equivalent is "profit" (e.g. "P/L" vs "income statements").
- littlestymaar 11mo agoI found the per calculation highly suspicious, especially the first row: > Country Median Margin Average Margin Sample Size > South Africa 28.86% 82.37% 7 How can the average be 82% with a median being 28% without having one that is above 100%?
- foolswisdom 11mo agoIt's probably a weighted average, as described earlier in the article.
- deleted 11mo ago[deleted]
- kqr 11mo agoGood catch. If there are n samples, and the lower half of them are equal to or less than 0.29, then a total mean of 0.82 would require that sum of the the upper half must be greater than 0.82n - 0.29n/2 = 0.675n. For n/2 numbers to sum to 0.675n, the mean of those numbers must be 1.35, which is decidedly above 100 %, proving at least one of the numbers must have been greater than 100 %. It being a weighted average does sound like a reasonable explanation, though. A median of 0.29 and weighted mean of 0.82 is trivially possible given e.g. values (0.29, 0.29, 0.82) and weights (0, 0, 1).
- dmboyd 11mo agoCertainly possible if their calculation of income included non operating income otherwise excluded from revenue. (Eg. A gain on sale that dwarfs the underlying business). Such presentation is prevalent and a disclosure of “gross profit” isn’t uniformly required under GAAP
- cmiles8 11mo ago“Your margin is my opportunity” Absent a true monopoly or government protection high margin businesses are usually those most ripe for disruption. Someone eventually comes along and, for various reasons, is willing to make far lower margin and then the battle begins. Lots of sleepy high margin businesses out there just waiting to get picked off by a new entrant.
- regularfry 11mo agoConversely, the ones which still exist are biased towards industries where that's very hard.
- cluckindan 11mo agoAnd thus we get into the territory of profit hiding and transfer. Executive consultancies are a common mechanism for doing that, as hourly fees can be exorbitant without anyone batting an eye. It lowers the profit of a public company, thus decreasing pressures to pay a dividend, while the consultancy leeches money and pays it forward to some other company in which the public company’s founders/executives are direct beneficiaries.
- raw_anon_1111 11mo agoMargins are also high based on brand. But software by definition should be a high marginal profit business.
- scott_w 11mo agoIn theory but not in practice. Apple has massive margins but they're not being disrupted by a slightly cheaper iPhone. In fact, plenty of big tech companies sit in this bucket (thus the reason they've sat on massive cash piles for so long!)
- Sevii 11mo agoA slightly cheaper iPhone is already in the market (android). In theory Apple shouldn't be able to maintain these high margins.
- JCM9 11mo agoGood article although especially in tech it’s not so simple. Thanks to games with depreciation and other financial engineering a company may look “profitable” but still be quite unhealthy or at risk. One generally needs to look at “profit” in the context of cash flow. I.e. a company could be “profitable” but also basically broke at the same time with no cash to pay people or suppliers.
- jbs789 11mo agoMany lenses. I do like the authors focus on one. But you’re right it doesn’t tell the whole story. Op margins are a great way to think about where one might see mean reversion, which then flows to net. Ie are there structural reasons for the op income or is it a maturing sector which will attract new entrants.
- jddj 11mo agoIt skews the other way just as often in my experience. That large clump at 10% has some wildly profitable businesses in it.
- PopAlongKid 11mo agoThe comment you are responding to was "profitable but no cash flow" (due to non-cash deductions). I'm not clear what you mean by "the other way".
- deleted 11mo ago[deleted]
- jimnotgym 11mo agoIf you were "profitable but no cash flow" then you must have non-cash additions to your profit, not deductions. A classic example of 'profit but no cashflow' might be where you made a profit but spent a lot of money on stock that you haven't sold yet. Or you made a lot of sales that you are yet to be paid for. In the PE world it is just as likely that you made a profit before interest and tax, but you paid it all in interest. You would then have an operating profit but no cashflow due to a cash item. It could still make it a good business to own, if you didn't need the debt, or wanted to have the interest paid to you. Maybe you made a profit but paid it all in dividends to a holding company. Then you have a profit but no cash flow due to cash items that don't affect the p&l.
- alexpotato 11mo agoThis article is very timely as I was just thinking about margins given that I run a couple small websites that use Amazon Affiliate marketing. The margin on most items is 4% (some lower, some higher e.g. luxury items are 10%). 4% is not terrible in and of itself. But then you factor in: - advertising costs - conversion rates on clicks from the above - taxes and you get a real appreciation for how hard it must be to run high volume/low margin businesses. Sure, you can do organic marketing etc but then you are just trading time for dollars.
- a5seo 11mo ago> organic marketing etc but then you are just trading time for dollars. But the alternative, trading dollars for dollars, is essentially just arbitrage, which tends to disappear from competition. Organic marketing is the only sustainable source of alpha I’ve found in affiliate marketing.
- deleted 11mo ago[deleted]
- k3liutZu 11mo agoShouldn't you include the ad costs in your margin calculation?
- alexpotato 11mo agoYeah, the 4% is really Gross Margin (although COGS here is effectively zero).
- therealdeal2020 11mo agohmm yes but also most great startups have a negative operating margin on paper since they re-invest almost all their earnings into development, marketing, etc... just dividing earnings by revenue won't give meaningful insight in most companies that intend to grow or expand.
- zeckalpha 11mo agoReinvestments in the business factor into a different ratio. This only factors operating expenses.
- projektfu 11mo agoI suppose it depends where things end up in the system you use. Usually, R&D ends up as an expense in GAAP (in the US) but you could produce a supplemental statement showing that as capitalized investment. Even so, early-stage industries often have negative operating profit. Imagine you are working on a drug you will take to testing next year. You could be 5 years from actually marketing it. Even if you capitalize all the expense of research and development, to get it off the income statement, you still have to pay for the rest of the business.
- carefulfungi 11mo agoOperating margin doesn't include interest or taxes; it is an incomplete ratio (but any single ratio will be incomplete) when comparing companies across industries with different capital expense levels, debt levels, and tax exposures. This article compares the gross profit vs. net profit differences by industry. https://www.venasolutions.com/blog/average-profit-margin-by-industry https://www.venasolutions.com/blog/average-profit-margin-by-...
- truelson 11mo agoOperating margins are also holding up the economy in a different way than you think (the cyclical economy). Wrote about it here: https://writings.alethia.news/the-biggest-piece-of-the-recession-puzzle/ https://writings.alethia.news/the-biggest-piece-of-the-reces...
- OisinMoran 11mo agoIf you enjoyed this you'll probably also enjoy "The Games People Play With Cash Flow" [0] And for the classic HN comment about the site itself: I think it looks very nice, but the native justification algorithm is not very good (especially with hyphenation turned off) so it ends up looking quite sparse at parts on mobile and is a bit jarring to read. I'm a big fan of this implementation [1] of the TeX linebreak algorithm for the web, and think it would make this site look even better with minimal effort. [0] https://commoncog.com/cash-flow-games/ https://commoncog.com/cash-flow-games/ [1] https://github.com/robertknight/tex-linebreak https://github.com/robertknight/tex-linebreak
- cs702 11mo agoThis ignores the capital intensity of different businesses, and the rate of return on that invested capital, which is tied up in the business.[a] -- [a] Warren Buffett has written and spoken extensively about return on invested capital for more than six decades.
- baxtr 11mo agoDo you mind sharing a link of your linking for (a)? Thank you
- coatmatter 11mo agohttps://www.berkshirehathaway.com/letters/letters.html https://www.berkshirehathaway.com/letters/letters.html
- jimnotgym 11mo agoI'll summarise the thinking for you. If you got $1m in profit that sounds great. But if you had to invest $1bn to get it, that sounds less good, because you could have made more by putting the money in the bank at a much lower risk. Profit only makes sense when considered against the amount of capital required.
- itake 11mo agoIsnt thay accounted for in the revenue - profit equation? The cost of capital is expressed in their balance sheet as expenses or depreciation. Pay back loans, investors, etc are all considered when calculating profit.
- redwood 11mo agoIn theory but that's where the accounting games come in: how you choose to capitalize the expenses over what time horizon and how you recognize the returns are extremely relevant. While you might point out that there are commonly accepted accounting principles, you'll also note that people use all kinds of different approaches for different types of businesses were where they argue the commonly accepted model is not quite the right fit the shape of the business
- akshayrajp 11mo agoCan I just say that your blog's design is so beautiful and readable? Do you mind sharing how you built it?
- lbotos 11mo agoright click -> inspect HTML looks pretty handwritten (lack of crazy css classes and simple structure) <link rel="stylesheet" href="https://fi-le.net/css/tufte.css https://fi-le.net/css/tufte.css"> They are using tufte.css https://edwardtufte.github.io/tufte-css/ https://edwardtufte.github.io/tufte-css/
- graerg 11mo agoPart of it is this tufte.css: https://edwardtufte.github.io/tufte-css/ https://edwardtufte.github.io/tufte-css/
- fi-le 11mo agoThank you! As the other commenters already figured out, I manually write HTML and use tufte.css with some minor customizations.
- infecto 11mo agoGross margin along with ebitda are great ways to do quick views on a company from an investor standpoint. You don’t care about tax, interest depreciation because those things can easily change, you care about the core business. Gross margins are high but ebitda margins are low? Then you know where to look in the finances to ask the first question of what is happening in the middle. If gross margins are low, probably a non starter unless it’s a non commodity product where you can raise price.
- jgeada 11mo agoWould be interesting to see the historical trends for operating margins. These days it seems that 30%+ operating margins are what VCs and stock market are expecting now, which seems unsustainable. Software and similar businesses can easily do it because cost of manufacturing one more unit is close to zero, all the costs are primarily NRE. Not all business fit that model and but yet they all aspire to the same margins.
- abirch 11mo agoI think another aspect here is Return on Equity (part of the Dupont equations) where you can have lower operating margins but be heavily levered. That's what private equity loves.
- bob1029 11mo ago> While it's not illegal to try and compete with Nvidia (margin in 2025: 61%) or Mastercard (margin in 2025: 54%), it's just so capital-intensive to catch up with their graphics card R&D / bank partner network that few companies are brave enough. I think the "quasi-monopoly" segment is the best attack vector if you are willing to get your hands a bit dirty. Companies like Mastercard and Visa are the closest thing you'll get to an actual money printer. The trick with starting these kinds of businesses is to find one customer (B2B) who is willing to do the crazy thing with you. Someone who is fed up with the current state of affairs in their domain. Ideally, someone who is already a customer of one of these vendors you seek to compete with. If I wanted to build a payment network from scratch, I would partner with a bank and begin with existing payment rails (Jack Henry, etc.,). and layer value-add on top (custom fraud detection, rewards programs). Over time, issuance, merchant acquiring and other concerns could be discussed once the trust and value proposition has been proven out. This is a very long play. The hardest part of breaking in is finding that first customer and making sure they're a good one. If you have a good partner, it really does feel like cheating by comparison. I've worked with banks who could get things out of vendors with a five minute phone call that we couldn't in a million years. Stack a few of these and it begins to look like you're on the correct side of the moat.
- corry 11mo agoEvery other type of business I come across or analyze makes me think "Man, there really is nothing as good as SaaS" and I thank my lucky stars I was here for it. High 80%+ gross margins; high retention/recurring revenues (if you're doing it right); easily metric'd (CAC, LTV, conv%, etc); capital specialized for deploying into it (most VC of the last decade); alignment with clients w.r.t. value/impact (or they don't renew); straightforward lining up of 'value to customer' and pricing; common benchmarks and shorthands for valuation multiples; etc. Simple business to understand / run / grow, assuming you have a good product in a good market. It really is quite the business model.
- jimnotgym 11mo agoI really hate the terminology of the first sentence > Divide a company's income by its revenue How about dividing a companies operating profit by its revenue? Income is a vague term and is just as often equated with revenue... which makes the opening sentence a bit weird. Going further, most people talking about different sectors having different margins are talking about the gross profit margin. In a retailer gross profit could be the sales minus the cost of the things that got sold and probably the cost of the people in the stores. In a service business it is normally the sales minus the cost of people doing the work that was sold. At a hosting company it could be the sales- minus the electricity, Internet, engineers. The important distinction is that gp does not normally include 'head office costs', accountants and other parasites, so it is easier to compare the different segments from the amount they are going to contribute towards your fixed costs.
- deleted 11mo ago[deleted]
- zackmorris 11mo agoThis is maybe the first dataset I've seen that clearly illustrates how margin (profit) is inversely correlated with value to humanity. Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth. Meanwhile the bottom 7 lowest-margin industries other than LiDAR and aircraft leasing (CRISPR, gene therapy, hydrogen fuel cell, genomics and mRNA therapeutics) arguably have some of the greatest potential to improve quality of life and help the planet. Sometimes it feels like everything that I care about most has been marginalized and commodified to the point of financial inviability. Meanwhile people who simply came out on the winning side of the multiverse and pulled up the ladder behind them are doing so well that they mock the rest of us for working by actively making our lives harder at every opportunity.
- BobbyTables2 11mo agoI also feel similarly when I was finishing grad school. I learned advanced engineering topics only to find that the “hot” areas were social media and cell phones. Not sure what, but always assumed there would be better uses of such an education. I was largely mistaken.
- candiddevmike 11mo agoAll of the money is mostly tied up in safe bets for boomers. You don't see capital chasing big bets because folks would rather get their 4-7%+ "guaranteed" than risk it on a startup. There's probably some meta commentary on the global risk climate in general since COVID here.
- toomuchtodo 11mo agoLonger life expectancy has led to stagnation due to those older in power and owning wealth to have reduced risk appetite for investment and innovation, leading to maintaining the status quo and their quality of life for the balance of life remaining. They are stealing from the future through the demand for profits today. Peter G. Peterson wrote about this in Gray Dawn 25 years ago, Scott Galloway talks about it today. https://openlibrary.org/books/OL385129M/Gray_dawn https://openlibrary.org/books/OL385129M/Gray_dawn https://www.ted.com/talks/scott_galloway_how_the_us_is_destroying_young_people_s_future https://www.ted.com/talks/scott_galloway_how_the_us_is_destr...
- TeeMassive 11mo agoIt's sad to see that the highest operating margins are not industries that produce actual value but financialized slop makers.
- next_xibalba 11mo agoGenerally "income" refers to net income, which, then invalidates "divide a company's income by its revenue, and you get the operating margin". Perhaps the author means to say "operating income". In any event, operating profit and even net income don't give you a good approximation of cash (unless you're doing cash accounting, which no real company is doing) because they include non-cash charges such as depreciation and amortization.
- nostrademons 11mo agoSo this article is conflating the 3 different types of margins [1], and that's at least partially responsible for the results it gets. It talks about operating margins, but the definition that it gives is actually the definition for net margins, net income / revenue. Operating margins uses operating income, which excludes interest, taxes, and capital expenses. There's also gross margins, which are basically the value you add over cost of inputs divided by your revenue, not counting salaries, marketing, customer acquisition, or any of the other stuff you have to do to get from raw materials to products in customers' hands. The article found that the highest margins are in ports, financial services, toll roads, etc. with certain key (but not all) software, AI, and semiconductors having good margins. But this is a logical consequence of the definition of margin they chose. These are all very capital-intensive businesses: it takes a huge amount of money to build a port, or a fab, or a search engine, or a road, or to start up a bank or insurance company. The financing cost of building these capital improvements, as well as the depreciation on them, is explicitly excluded from the definition of "margin" that the article chose. Note also that this explains why certain semiconductor and tech companies have high margins but many are very low-margin. If you are TSMC or Intel, you own your own fabs. You spend tens of billions of dollars to construct them, and the financing cost of those investments is explicitly excluded from the definition of "margin" chosen by the article. But if you are a random ASIC manufacturer, you pay TSMC to fabricate your chips, and those payments are included in Cost of Goods Sold and excluded from your gross margin, let alone your operating margin. Likewise, if you are Google, Amazon, or Microsoft, you're making huge capital investments in datacenters. But if you're a random SaaS, your cloud computing costs are included in COGS, they become revenue for the cloud provider, and so your operating margins look much worse. I'd be much more interested in seeing the analysis re-run with net margins. [1] https://www.investopedia.com/ask/answers/102714/whats-difference-between-profit-margin-and-operating-margin.asp https://www.investopedia.com/ask/answers/102714/whats-differ...
- purplepatrick 11mo agoThank you! I was just about to rant about this and decided to scroll to see if anyone had already called this out. The article is quite embarrassing - it’s ok if you don’t know how P&L statement and balance sheet work, but writing an entire blog post without ever feeling the need to verify basic terminology is either very lazy or very ignorant…
- tringuyen_cse 11mo agoI'm suprised that pharmaceuticals having quite low margin compared to other industries. This report shares an opposite story (https://pmc.ncbi.nlm.nih.gov/articles/PMC7054843/ https://pmc.ncbi.nlm.nih.gov/articles/PMC7054843/), but maybe because the numbers are not very recent (10 years ago)