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Profit margins: a sign of danger or a hallmark of quality?

Investors need to understand why a company has high margins and how it can protect them
Profit margins: a sign of danger or a hallmark of quality?

If you are looking to invest in very good businesses then one of the criteria that will be near the top of your list is likely to be high profit margins. A consistently high profit margin is often a hallmark of an outstanding business, but in some circumstances it may be a sign of trouble ahead.

There’s a lot to like about a business that has high profit margins. Given the choice, most people would prefer a business to be more profitable. Yet, high profit margins often indicate that the company concerned has something a little bit special about it.

They can be a sign that a company can do things with its products and services that few competitors can copy – known as an economic moat. These types of companies can turn out to be excellent long-term investments, provided they can keep their margins high while growing sales.

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