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Gross, operating, and net margins — the margin stack
Profitability ratios answer one foundational question: how efficiently does this company convert revenue into profit? Three margins — gross, operating, net — measure that efficiency at three levels of cost subtraction. Together they reveal whether you're looking at a high-margin franchise (durable pricing power, expanding earnings) or a low-margin commodity (vulnerable to small input-cost spikes). The trend over time matters more than any single year. The platform's Ratios tab plots all three over 10 years for every company.
= (Revenue − COGS) ÷ Revenue. SaaS companies run 75-85%; semiconductor firms 50-75%; consumer staples 40-55%; airlines 20-30%; grocery chains 25-30%. The level reflects industry structure (Porter's Five Forces from m4); the trend reflects the company's pricing power within that structure. = Operating Income ÷ Revenue. Captures the entire operating engine after R&D and SG&A but before interest and taxes. = Net Income ÷ Revenue. The bottom line, including financing and tax effects.
When fixed costs are high but variable costs are low, each new dollar of revenue drops disproportionately to operating income. NVIDIA's chip designs cost billions in R&D upfront; the marginal cost of selling another GPU is small. As revenue expands, fixed costs are spread over more units, and operating margin rises sharply. NVDA's operating margin went from 18% in FY2023 to 62% in FY2025 as AI demand exploded — operating-leverage math in action. The same principle works in reverse during downturns. Operating-leverage businesses (semiconductors, software, media) have wider margin volatility through cycles than low-leverage businesses (consumer staples, regulated utilities).
The most important profitability question is the trend, not the level. A company at 15% operating margin expanding 200 basis points per year is creating earnings growth on top of revenue growth — and the multiple-expansion math typically rewards margin expansion. A company at 30% operating margin compressing 100 basis points per year is losing pricing power even if it still looks profitable. Read 5-10 years of margins; ignore single-year snapshots. The empirical pattern: companies expanding margins through cycles are correlated with above-benchmark long-run returns, even when starting from already-high levels (Costco, NVIDIA, Microsoft post-2014 are textbook cases).
NVIDIA's fiscal-year margins from 2023 to 2025 illustrate operating leverage at industrial scale. Gross margin expanded from ~57% to ~78% — a 21-percentage-point expansion. Operating margin expanded from ~18% to ~62% — 44 percentage points. Net margin from ~16% to ~56% — 40 points. The driver: AI demand caused revenue to multiply roughly 3-4x while fixed R&D and SG&A stayed flat or grew much more slowly. NVIDIA's chip-design fixed costs (engineering teams, EDA tools, chip masks) are large; manufacturing is contracted to TSMC. As chip volume scaled with the AI build-out, the fixed costs were spread across far more revenue, and margins exploded. The lesson: in operating-leverage businesses, modest revenue accelerations produce dramatic earnings accelerations — and modest decelerations produce dramatic deceleration. Source: NVIDIA fiscal year 10-K filings 2023-2025.
The Ratios tab plots all three margins over 10 years with peer-group comparisons. The KPIs tab tracks margin trends quarter-by-quarter so you can spot inflection points. The /screener page filters by margin level and by margin expansion rate — useful for finding operating-leverage businesses early in their inflection. The Insights tab adds segment-level margin disclosure where companies report segment data.
First: comparing margins across industries. A 20% operating margin is excellent in airlines but mediocre in software. Always benchmark to industry peers, not to a textbook number. Second: focusing on level instead of trend. A 30% margin compressing 100bps/year is worse than a 15% margin expanding 200bps/year, on a 5-year-out basis. Third: ignoring non-GAAP gymnastics. Companies whose 'adjusted' operating margin is materially higher than GAAP are flagged for the GAAP/non-GAAP gap discussed in m2_l2. Real margin analysis uses GAAP numbers, with non-GAAP as a sanity check, never as the headline.
Look at Coca-Cola — they sold a billion drinks a day for decades at the same brand premium. The margin trend is what tells you whether the business is winning or losing. Stable high margins mean pricing power. Expanding margins mean improving competitive position. Compressing margins mean trouble.