I googled this before starting to write. Most of what I found was, well, ridiculous. Not that the definitions were wrong, but to my mind the interpretations were at best incomplete.

Every publicly-traded company has three sets of accounting statements: management control books to run the company, tax books to show the IRS, and financial reporting books to show you and me. We don’t get to see the first set at all–they’re about structuring operations into cost centers vs. profit centers as well as tax planning. And we only get a glimpse at the second through the reconciliation in the financial reporting tax footnote of the dour view the IRS sees vs. the much rosier picture presented to shareholders.

The margins themselves are calculations of various levels of profit–gross, operating, pre-tax, net… as a percentage of sales.

My take:

–the general perception is that high margins are better than low ones. To some degree that’s true. The obvious worry, though, is that if margins are too high they’ll will attract competitors

–the margin numbers themselves aren’t the whole story, either. Tiffany, one of my favorite companies to have new analysts work on back in the day, but which is now a part of LVMH, had a pre-tax margin of 15% in its final year as a public company. On the surface, that’s pretty/really good. But the nature of the company’s business requires it to carry finished goods inventory equal to about a year’s sales, with raw materials + work in process equal to about another six months’. So a good chunk of that margin represents the cost of maintaining the right level of stuff to sell in its stores and the risk that some expensive items may just gather dust. Then, of course, there’s the expense of maintaining its store network. Yes, an attractive margin, but not the bonanza the raw pre-tax margin might be read as implying

–the relationship between payables and receivables is another factor to consider. Generally speaking, it’s a sign of strength if a company can get paid for its wares faster than it has to pay its suppliers. Put in balance sheet terms, this means Payables (to suppliers) would be significantly greater than Receivables (from customers). This is the case with Tiffany. In the negative case, however, a firm could “manufacture” sales and profits by offering super generous payment terms. Chances are high, in my view, that this situation will end in tears. Whether it does or not, a blowout in Receivables can create phantom profits (and operating margin) that make a firm look better than it is. Same thing with a shrinkage in Payables, which may signal that suppliers are worried about extending credit. The point is that while potential bad news may not have shown up in margins, investors will presumably be reacting to deterioration in the payables/receivables relationship.