How consistent gross margins have been over five years. Low variability signals stable pricing power. Below 3 percentage points of variation is excellent. High variability suggests exposure to commodity prices or competitive pressures.
Formula
Description
Measures the consistency of gross margin over the past five years. Low variability indicates a business with stable pricing power and predictable cost structure. Warren Buffett has noted that companies with stable margins tend to have durable competitive moats.
Interpretation
Below 3 percentage points of standard deviation is excellent. Above 5 points suggests the business may be exposed to commodity price swings, competitive pressures, or volatile input costs. Compare to industry norms.
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Overhead costs (selling, general, and administrative expenses) as a percentage of revenue. Below 30% is generally efficient. Buffett notes that companies with consistently low SGA ratios tend to have durable competitive advantages.
Research and development spending as a percentage of revenue. The ideal range depends on industry: tech companies often spend 15-25%. Too little may mean underinvestment in the future; too much may burden profitability.
Total operating expenses divided by revenue. Below 0.8 indicates a healthy 20%+ operating margin. Above 1.0 means the company isn't covering operating costs with revenue. A declining ratio signals improving efficiency.
Total revenue divided by employee headcount. Measures workforce productivity and business scalability. Technology companies with platform models tend to lead. Above $300,000 is generally strong.
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