Why Margins Matter
Just because a sector is growing does not necessarily mean profits. Margin compression is an issue we evaluate on an ongoing basis as this is a significant determinant of the trajectory of stock prices.
Why does margin compression matter?
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“What Is Margin Pressure?
Margin pressure is the risk of negative effects from internal or external forces on a company's profitability margins. Most commonly margin pressure analysis will focus on the three main income statement margin calculations: the gross, operating, or net margin. Overall margin pressure can also be analyzed within contribution margins as well.
Margin analysis is primarily used to understand how profitable unit sales are at different points on the income statement in comparison to total revenue. A unit of sales can be adjusted for a multitude of costs including direct costs, operating costs, and net costs. In general, anything that makes a company’s costs or revenues change will usually cause a change in the margin. Margin pressure is perceived as any cost or revenue change that could lower a margin calculation, ultimately resulting in lower profitability.”
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Source: https://www.investopedia.com/terms/m/marginpressure.asp
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A recent article on CNBC.com highlighted the problem of margin compression. In this case the challenges faced by the EV industry are highlighted. But in the end, it comes down to the same thing; margin compression.
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“Shares of China’s largest automakers sank Monday after Chinese electric-vehicle giant BYD offered fresh discounts across more than a dozen models, and an executive at another car company fretted openly about the country’s deepening price war. BYD’s moves cut the starting price of its cheapest model, the battery-powered Seagull hatchback, to 55,800 yuan ($7,765), from nearly $10,000.
The BYD price cuts, along with other developments, signal a potential tipping point, where weaker players can no longer sustain deepening losses from the downward spiral on prices, said Tu Le, managing director of Sino Auto Insights, an advisory firm.
“This points to a bloodbath later this year,” he said. “This could be the first domino that would finally put pressure on weaker players -- startups like Neta and Polestar -- that have been teetering.””
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Source:
https://www.cnbc.com/2025/05/27/china-auto-market-price-war-stokes-fears-of-industry-shake-out.html
