To understand falling margin, you first need to get a handle on margins. What are margins? There are profit margin, operating margin, and gross margin. All are measures of how much money a company keeps after it pays for different aspects of the production of a product. Gross margins tell you how much is left after you have paid for labor and materials. Operating margins tell you what is left before taxes and one-time charges. Profit margins tell you what is left after all of the bills have been paid.
When the opposite happens, look out below. Falling margins indicate that sales are expanding faster than earnings. Falling margins normally mean slowing earnings, and indicates a great place to look for shorts.
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