When valuing a company, you often hear people ask, How much does it cost to make this product, and how much does it sell for"? Depending on the answer, it's then determined to have a good or bad margin

Accounting Dec 18, 2020

When valuing a company, you often hear people ask, How much does it cost to make this product, and how much does it sell for"? Depending on the answer, it's then determined to have a good or bad margin. What does this mean? Is this a profitability ratio? Also, what would be a good margin?

Expert Solution

Think of the margin as the spread between what a product costs to make and sells for. For example, if it costs me $5 to make a widget and a sell it for $10, I have a 50% profit margin. The gross margin is one of the profitability ratios.

A "good" margin is heavily industry dependent. Grocery stores run on very thin margins such as 1-3% and depend on a volume of sales to make a profit. A cell phone company might be able to sell a phone for ten times what it costs to make.

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