Driving the Growth of Gross & Operating Margins


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There are several layers of profitability that analysts monitor to assess the performance of a company, including gross profit, operating profit and net income.


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Each level provides information about a company's profitability. Gross profit , the first level of profitability, tells analysts how good a company is at creating a product or providing a service compared to its competitors. Gross profit margin, calculated as gross profit divided by revenues, allows analysts to compare business models with a quantifiable metric. Without an adequate gross margin, a company cannot pay for its operating expenses. In general, a company's gross profit margin should be stable unless there have been changes to the company's business model.

For example, when companies automate certain supply chain functions, the initial investment may be high; however, the cost of goods sold is much lower due to lower labor costs.

BREAKING DOWN 'Gross Profit Margin'

Industry changes in regulation or even changes in a company's pricing strategy may also drive gross margin. If a company sells its products at a premium in the market, all other things equal, it has a higher gross margin. The conundrum is if the price is too high, customers may not buy the product. Analysts use gross profit margin to compare business models with competitors.

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Gross Profit Margin

More efficient or higher premium companies see higher profit margins. The company has figured out a way to reduce the costs of goods sold by five times its competitor. To make up for the loss in gross margin, the competitor counters by doubling the price of its product, which should increase revenue. The competitor lost gross margin and market share. This means ABC earns 50 cents on the dollar in gross margin.

Profit is the financial benefit realized when the amount of revenue Gross income is the total income from all sources before deductions Software companies have incredible economies of scale because their marginal cost of serving additional customers is low. Neither of these apply to Uber.

This is probably due to increases in say, service quality, rather than strictly a result of more customers. One ubiquitous technique for estimating costs in manufacturing is learning curves: Uber has no moat. Drivers and riders can easily switch to another firm offering higher pay and lower prices, respectively.

Analyzing Operating Margins

Despite having a fraction of the market share, Lyft has had response times similar to Uber for years now, in major markets based on personal experience in Los Angeles. In , revenue growth rate will slow further, even if ride subsidies are maintained. Uber will cut them to become profitable, further hampering growth. Uber has new mantras to separate investors from their money. As for AVs, even if they are viable soon, it will be cold comfort to Uber.


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As of January , there were 49 companies cleared to test AVs in the state of California alone. It could pay car owners a rate above marginal cost of a ride but below the total amortized cost of ownership.

Why Are Operating Margins Important?

It will have to compete with vertically integrated rivals like GM. Apps that aggregate pricing will quickly channel riders to the cheapest ride available. In its first few years, Uber was fighting for a toehold in the market, and getting the basic app functionality down. By contrast, future progress is in incremental gains through product refinement.

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Fewer crashes will mean fewer payouts, and less spending on support and administration. Ride-hailing has no doubt improved the experience of taking a cab. The use of smartphones ignited innovation in an otherwise conservative sector.

Driving the Growth of Gross & Operating Margins Driving the Growth of Gross & Operating Margins
Driving the Growth of Gross & Operating Margins Driving the Growth of Gross & Operating Margins
Driving the Growth of Gross & Operating Margins Driving the Growth of Gross & Operating Margins
Driving the Growth of Gross & Operating Margins Driving the Growth of Gross & Operating Margins
Driving the Growth of Gross & Operating Margins Driving the Growth of Gross & Operating Margins
Driving the Growth of Gross & Operating Margins Driving the Growth of Gross & Operating Margins
Driving the Growth of Gross & Operating Margins Driving the Growth of Gross & Operating Margins

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