Hundreds of stocks are traded daily in the bourses. Some go up and some down irrespective of the fact whether it is a bull market or bear market. To gain from appreciation of shares it is essential that some principles are followed in the selection of stocks. One such yardstick is the Profit Margin of the company. Listed companies publish quarterly results every three months stating inter alia the revenue earned, cost of raw materials, interest pay out, depreciation, other expenses, other income, net profit, taxes paid etc. PROFIT MARGIN is calculated on the basis of net profit in relation to total sales. In computing profit margin one time profit shown in other income is to be deducted from net profit for correct assessment of profit margin. The higher the profit margin, the more attractive the company is. But this is to be noted that some businesses with higher profit margin do not deserve higher valuation. Pure mining companies have very high profit margins but they are valued less than companies in many industries like FMCG, pharma etc. For correct  assessment it is therefore necessary to consider the profit margin of companies in the same industry. Secondly, in assessing profit margin results of at least two-three years with their quarterly break-up might be taken into account for optimum results. 

But investment will not grow if the profits of a company even with higher profit margin remain static over the quarters and years. Profit should grow along with a robust profit margin for the company to grow and have high valuation. Growth is the key word in stock market. Companies with static or lower profit margin may be considered for investment if fundamental change in the company is envisaged/underway indicating business growth and corresponding profit expansion. Otherwise such companies with static profit margins are best avoided as there will be little appreciation in such companies

The high profit margin indicates the efficiency of the company. Commodity businesses generally have fluctuating profit margins, high when the market price of their products is high but low when their market price falls and even make losses when their price is too low. This gyration of product prices affects the consistent growth of the company. Such companies are therefore not valued high in the stock market. Their shares are bought when their market prices are low and sold when their prices are higher in tandem with their product prices. Metals, oil and gas and other commodity players generally fall under this category. In comparison profits of FMCG, pharma, software etc. companies are steady and consequently their share prices are not vulnerable to severe fluctuation and grow steadily over the years.