Published: 02nd Nov 2024
By: Value Research
Margins reflect how much revenue a business converts into profit. If a company earns Rs 10,000 crore but spends Rs 8,000 crore. That leaves a profit of Rs 2,000 crore, a 20% margin. High margins mean high efficiency. So, does low margins mean the opposite? Not always!
Margins vary greatly across industries. In sectors like retail, low margins don't necessarily mean inefficiency as retailers often compete on price, not margins. Lower prices, in such cases, boost sales volumes and overall revenue, which might be a smarter strategy than aiming for higher margins.
It had a five-year average net margin of just 2.2% (as of January 2023) but its high asset turnover (revenue a business makes using its assets) and strong bargaining power with suppliers led to a healthy 15.5% ROE.
Evaluate these factors: What sector does it operate in? Is low margin typical for this sector? Does it efficiently use its assets? Does it consistently generate high ROE and ROCE?
Don't dismiss a company based solely on its margins. Understand how it manages its operations and assets to deliver value. Check which low-margin Indian companies have delivered strong ROE and ROCE in the past from the link below.
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