Thread by @ShubhamBiswal18

I think not a lot of people understand the difference between two very important return ratios : operating margins and roc/roic. Both seem very similar but there's a huge difference. Both have their own merits that help you understand the key competitive advantage of any business

Operating margin/ebitda margin simply means how much value a company can add to its raw materials to sell the final product. It has two key elements - sales and (cogs+sga). So if a company has high ebidta margins it simply means two things :

1. That the company is able to

Cut costs efficiently or is able to make products that are difficult to make or need some process expertise (if everybody could make it the the cost would drop). For this two examples come to mind - look at cos like Divis and clean science. They have been able to maintain 30%+

Opm for almost 5-10 years now, showing they have products that others are not able to replicate easily, thus being able to maintain those margins. And that's true as well if you look at their businesses, they are leaders/monopoly in some of the product categories they make.

On the other hand look at commodity cos like tatasteel - everytime the margins go up due to good demand, new players start setting up plants/capacities, which leads to oversupply and then the margins take a back seat - thus the fluctuating margins. So overall operating margins

Can give us some insights into the competitive advantages of the business. However - roce is a different thing. Will discuss this in the next post.

#roce #opm #investing #margin