4 Ratios every investor should know

Want to find quality companies?

Try these profitability ratios.

Let's dive in.

Use these ratios to determine:

- Profitability
- Efficiency
- Moats

Gross margin > 40%
EBIT margins > 20%
Net Income margin > 20%
FCF margin > 10%

1?? Gross Margin

Gross Margin = Gross profit / Revenues

Buffett likes a gross margin of > 40%. 

Could indicate a moat + pricing power if the margin grows or remains steady.

2?? EBIT Margin

EBIT Margin = EBIT / Revenues

Great starting point for FCF and NOPAT

Look for margins > 20%

3?? Net Income Margin

Net Income Margin = Net Income / Revenues

Buffett likes net income margins > 20%

Also known as net profits, earnings, or the bottom line.

4?? Free Cash Flow Margin

FCF Margin = FCF / Revenues

Look for FCF margins > 10% for quality companies.