Author Menu
Client Account
Category Tree
Site Search
Friends
Article
Profit Margins: The 5th Element of The Buffett Way
submitted: Jul 23rd 2008 |
by: MartinSejas
Total views: 5 |
Word Count: 544 |
| 
| 
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.
Before answering this question, I will outline what a profit margin actually means just in case some people are not aware of the concept. Profit margins are obtained by dividing net income by net sales. This essentially shows what percentage of net sales becomes net income after taking into account expenses (including tax).
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.
Obviously, profit margins are a good indicator as to whether a company is really worth investing in. Despite that, most investors don't use effectively use profit margins to maximise their chances of success just like the master Warren Buffett.
The Buffett methodology revolves around historical profit margins. That is, profit margins recorded over a number of years in the past. A good strategy is to go back at least 5 years and see how profit margins have evolved since. In total there are 3 types of profit margin patterns that an investor can observe and the reason why they should each be understood is explained below.
A typical pattern observed is a stable profit margin over the time period chosen for the analysis. This can be both good and bad news for the investor. It is positive news for the investor if this is high because it means that any increases in expenses during that time have been absorbed and controlled well. It is negative news for the investor if this is low because it implies that the company has not been able to keep expenses under control over that period of time.
Another common pattern is that of an increasing profit margin over the time period chosen. This is obviously good news for any investor, but before making any decision to invest, it may be wise to go through other parts of the Buffett methodology explained in the 4 previous articles of this series.
A third typical pattern observed is one where the profit margin has steadily decreased during your elected analysis time frame. This implies that the company has been unsuccessful in controlling rising expenses over time and is largely negative news for investors. That said, it would still be wise to look at the other 4 component of the Buffett methodology before making a final definitive decision.
All in all, Buffett's methodology involves 5 components explained in this article and my 4 previous articles. The fact that the richest man in the world used this to achieve such success means that it must be learned and understood by all investors throughout the world. Nevertheless, this is not the only strategy to use. There are so many others with varying levels of success. Keep an eye out for future articles regarding new and important strategies any investor can use to become rich and successful.
About the Author
Author Martin Sejas is the owner of Stocks-And-Commodities.com, a leading stocks trading website dedicated to finding the best and the newest strategies and techniques for stocks and commodities trading. Its mission is to become the 'one-stop shop' on the best stocks trading websites and programs on the World Wide Web.
Article Source: Unique Financial Articles
Comments
No comments posted.
You do not have permission to comment. If you log in, you may be able to comment.
