Compare Profit Margin across Different Sectors

In the article “Calculate Profit Margin”, we explained what is profit margin and why it is important to a company. We also used Caterpillar’s real net income statement to show how to calculate a company’s profit margin. Because profit margin is a ratio to measure a company’s profitability, we would like to know if different business sectors have different profit margin due to the nature of the business operation. In this article, we are going to compare profit margin across different sectors to see if profit margin difference exists or not.

Methodology

Sector Categorization

We categorize companies into nine sectors based on Yahoo Finance definition. The nine sectors are Basic Materials, Conglomerates, Consumer Goods, Financial, Healthcare, Industrial Goods, Services, Technology, and Utilities.

Company Selection

Among all tradable companies, we choose those that can be traded by options. The reason for that is because we would like to select companies that have certain liquidity. The company that can be traded by options means that they have certain liquidity. Currently there are 2825 companies that is option tradable.

Profit Margin Calculation

1. use Stock Financial Statements Download (SFSD) to batch download all target companies’ most recent net income statement
2. calculate each company’s profit margin ratio by formula: Net Income / Revenue
3. Compile the calculated company profit margin according to the sector it belongs to
4. use the median profit margin number of the specific sector to represent the sector’s profit margin
Note the median is used instead of average to avoid the distortion due to long tail distribution

Result

Following table is the calculation result

Sector	Sample Number	Median Profit Margin
Financial	521	0.17
Utilities	92	0.08
Technology	518	0.06
Industrial Goods	232	0.06
Basic Materials	357	0.06
Consumer Goods	253	0.05
Services	574	0.04
Healthcare	274	0.04
Conglomerates	4	0.035

There are several observations we can make from this table:
1. In this particular year (2012), financial sector has incredibly high profit margin compared to other sectors. We believe it has something to do with rebound from financial crises.
2. Exclude Financial sector, utilities sector has the highest profit margin, followed by technology, industrial goods, and basic materials sectors
3. Conglomerates sector has the lowest profit margin. However, it’s hard to make a conclusion because the sample is too small (only 4)

Further Analysis

We can further breakdown the data more into different industries inside each sector. Click here to download the raw data


From the breakdown table, we can see that there are some industries that could have high profit margin even though the sector they belong to has low profit margin. Take Cigarettes industry for example, it belongs to consumer goods sector, which has median profit margin 5%. However, this industry has median profit margin 25%.
We can plot the raw data to see the distribution:
It is obvious that even belongs to the same sector, profit margin across different industries can be huge different. Take consumer sector for example, cigarettes industry can have 25% profit margin, while farm products industry only has 1% profit margin