Benefit of High Profit Margin (高净利润率的好处)
Profit margin of a company varies depending on their business segment, some may be high, and some may be low. However, why is profit margin important when we are investing a company?
First, we should talk about how to calculate profit margin, it is to take its net profit and divide by revenue. As an example, Company A earned RM1 million of revenue but its net profit is only RM50k, which makes their profit margin only 5% (RM50,000 / RM1,000,000). By only having 5% of profit margin, meaning that Company A only earn RM5 for every RM100 that is produced, and it is considered to be relatively low.
Furthermore, when you have low profit margin, a slight increase in material cost, or higher administration cost may cause you to earn lesser. Take Company A as an example again, if the company is earning RM50k because oil price is low, then it will earn lesser when oil price rebounded, probably will only earn around RM40k, which make their profit margin even lower. In worst case scenario, Company A will even be in the red when all other expenses increased, causing them to lose money.
On the other hand, company with high profit margin seemingly to have a protective gear. Let say Company B have 30% profit margin, which is relatively normal for technology or precision engineering companies. Even if all the material cost and administrative cost increase, they margin will probably dropped to 20%, but it is still high, considering the company is making RM20 for every RM100 sales.
Some real life examples are given. JFTECH and UCHITEC has relatively high profit margin because of their business segment, where their businesses are precision engineering and manufacturing of coffee machine, respectively. On the other hand, JCY and VS has lower profit margin because their businesses are HDD base manufacturing and EMS, respectively.
In short, we can see that companies that do more precise stuff and manufacturing more complicated item will tend to earn more, since they will have to pay extra care on their product. On the other hand, companies will earn lesser when they are only assembly items, or manufacture components that does not require extra care. All in all, companies with higher profit margin can be considered to have an extra shield on their businesses.
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