Technical / Accounting
Margins
Master gross, operating, and net profit margins—the three profitability ratios that reveal how efficiently a company converts revenue into profit.
"Your margin is my opportunity." — Jeff Bezos
Concept
Margins measure profitability at different levels of the income statement. Each margin strips away a layer of costs to show how efficiently a company operates. Gross margin shows manufacturing efficiency. Operating margin shows business efficiency. Net margin shows what's left for shareholders after everything—including taxes and interest.
Intuition
Each margin answers a different question:
- Gross Margin: Can you make money selling your product? (Unit economics)
- Operating Margin: Can you run a profitable business? (Operating leverage)
- Net Margin: What do shareholders actually get? (Bottom line)
Margins compress or expand based on volume and pricing power. A company with high fixed costs sees operating margin explode as revenue grows (operating leverage). A commodity business with no pricing power sees margins crushed when input costs rise.
Components
Gross Margin
What It Is
The percentage of revenue remaining after subtracting Cost of Goods Sold (COGS). This is the profit from your core product before any overhead.
How to Calculate It
Interview Script
Margins measure profitability at different levels of the income statement—gross margin shows manufacturing efficiency and whether you can make money on each unit sold, operating margin shows whether you can run a profitable business after overhead, and net margin shows what shareholders actually keep after taxes and interest. The key insight is that margins expand or compress based on volume and pricing power—companies with high fixed costs see operating margins explode as revenue grows due to operating leverage, while commodity businesses with no pricing power get crushed when input costs rise.