- The four margins, what each one excludes, and when to use which
- Why the trend in margins matters far more than the level
- What margins are normal in different Indian sectors
A mobile-phone reseller and a jewellery shop both do ₹1 crore of sales a month.
The phone shop buys a handset for ₹19,000 and sells it for ₹20,000. He keeps ₹1,000 — 5%. Out of that he pays rent, staff, electricity. He needs enormous volume to survive.
The jeweller sells a chain for ₹1,00,000 that cost him ₹78,000 in gold and making charges. He keeps ₹22,000 — 22%. He can survive on a fraction of the footfall.
Same revenue, entirely different businesses. Margin is what tells them apart, and revenue alone never will.
The four margins
- Gross marginFormula:
(Revenue − COGS) ÷ RevenueWhat it measures: Pricing power. Can it charge more than the product costs? - EBITDA marginFormula:
EBITDA ÷ RevenueWhat it measures: Operating efficiency before wear-and-tear and financing - EBIT / operating marginFormula:
EBIT ÷ RevenueWhat it measures: True operating profitability, after assets wear out - Net marginFormula:
PAT ÷ RevenueWhat it measures: What finally reaches owners, after interest and tax
- Both — revenue
- ₹1,000 Cr
- Consumer brand — gross margin
- 54%
- Consumer brand — EBITDA margin
- 21%
- Consumer brand — net margin
- 14%
- Contractor — gross margin
- 13%
- Contractor — EBITDA margin
- 8%
- Contractor — net margin
- 1.5%
The level tells you the industry. The trend tells you the company.
A 6% net margin is disastrous for a software firm and outstanding for a supermarket chain. So never judge a margin against a universal benchmark — judge it against the same company's own history and against direct peers.
- IT servicesTypical gross margin: Not usually reportedTypical operating margin: 20–27%
- FMCG / branded consumerTypical gross margin: 45–60%Typical operating margin: 15–25%
- Pharma (formulations)Typical gross margin: 55–70%Typical operating margin: 18–25%
- Auto OEMTypical gross margin: 15–25%Typical operating margin: 8–14%
- CementTypical gross margin: 50–60%Typical operating margin: 12–22%
- Retail / groceryTypical gross margin: 18–28%Typical operating margin: 4–8%
- Construction / EPCTypical gross margin: 10–18%Typical operating margin: 6–12%
- Commodity / metalsTypical gross margin: Cycle-dependentTypical operating margin: Wildly cyclical — 2% to 30%
Gross margin is the earliest warning system a business has. It falls before operating margin, which falls before net profit, which falls before the stock reacts.
Operating leverage — why profit can grow faster than sales
Some costs are fixed: the factory, the head office, the software licences. When revenue rises, those costs don't. So each extra rupee of sales carries a much higher share of profit than the last one — and profit grows faster than revenue.
Fixed costs of ₹300 Cr. Variable costs are 60% of revenue. Watch what a 25% revenue rise does to profit.
- Year 1 revenue
- ₹1,000 Cr
- Year 1 variable costs (60%)
- ₹600 Cr
- Year 1 fixed costs
- ₹300 Cr
- Year 2 revenue
- ₹1,250 Cr+25%
- Year 2 variable costs (60%)
- ₹750 Cr
- Year 2 fixed costs
- ₹300 Crunchanged
Margins can rise for excellent reasons — pricing power, scale, mix shifting toward premium products. They can also rise for reasons that reverse next year:
Input costs fell. A commodity user looks brilliant when its raw material gets cheap. That's the commodity cycle, not management.
Spending was cut. Slashing advertising or R&D lifts margin this year and hollows out the business over five.
Mix flattered the quarter. One high-margin order landed in this period.
The test: is margin expansion accompanied by volume growth and rising market share? If margins are up while volumes are flat, the company raised prices or cut spending — check which, because only one of those is durable.
- ✓Gross margin stable or rising across five years
- ✓Operating margin rising alongside volume growth
- ✓Margins above sector peers, and staying there
- ✓Margin held through an input-cost spike — real pricing power
- ✕Gross margin sliding while revenue grows
- ✕Margin up because advertising and R&D were cut
- ✕Margin far above peers with no explanation you can name
- ✕Margin swinging violently year to year — a commodity in disguise
- ☐Pull five years of gross, operating and net margin — direction first, level second.
- ☐Compare against two or three direct peers, not against the whole market.
- ☐If margins rose, name the reason: price, mix, scale, or cost-cutting.
- ☐If gross margin is falling, stop and find out why. This is the earliest signal you get.
- ☐Check whether volume grew too, or only value.
See it live · Our reports show each company's margins against its own five-year history and against its sector median — the two comparisons that matter.
Compare margins →In one screen
- 1Gross margin = pricing power; operating margin = running the business; net margin = what owners get.
- 2Judge margins against the company's own history and its direct peers, never a universal benchmark.
- 3Thin margins mean fragility as much as low profitability.
- 4Operating leverage makes profit grow faster than revenue — and shrink faster too.
- 5Falling gross margin is the earliest reliable warning a business gives.
Check yourself
Nothing is scored or stored — the explanation after each answer is the point.
A company's operating margin rose from 12% to 17% while revenue was flat and advertising spend halved. What's the honest read?
Why is gross margin watched more closely than net margin for early warnings?