Gross margin: key indicator for FR-CH? actions

Gross margin is a fundamental financial indicator for evaluating the performance of listed companies, both in France and Switzerland. Its analysis allows investors to better understand a company's ability to generate profits. This article explores the different aspects of gross margin and its importance in predicting stock performance on the French and Swiss markets.

Gross margin: definition and importance on the stock market

Gross margin is the difference between revenue and the costs associated with producing and selling its goods and services. This result is divided by revenue to obtain a percentage. Gross margin reflects a company's operational efficiency and its ability to generate value from its business. A high gross margin generally indicates a strong ability to absorb fixed costs and generate profit, while a low margin may signal structural difficulties or strong competitive pressure.

Gross margin trends over time are a key indicator for analyzing a company’s financial health and overall performance. They provide a clear perspective on how the company is adapting to market changes and consumer needs, while highlighting its ability to maintain healthy profitability over the long term.

A gradual increase in gross margin may come from better management of production costs or optimization of sales prices. This could encourage a company to invest more in research and development or to launch new products, thus strengthening its market position. Conversely, a decrease could reflect difficulties related to competition, rising raw material costs or changes in market demand.

Comparison of gross margins: France vs Switzerland

Swiss companies generally have higher gross margins than their French counterparts, particularly in the luxury, pharmaceutical and financial services sectors. This difference can be explained by several factors, including the high-end positioning of Swiss companies, their specialization in high value-added niches and their operational efficiency. The more favorable tax and regulatory environment in Switzerland also contributes to these performance gaps.

The more advantageous margins of Swiss companies compared to those of their French counterparts are directly reflected in their share prices, as we will demonstrate later.

Impact of margin variations on stock price

Gross margin changes typically have a direct impact on stock prices, particularly when earnings are released. An improvement in margin is often viewed positively by markets, as it suggests improved operational efficiency and earnings growth prospects. Conversely, a deterioration in margin can lead to significant stock price corrections, as investors anticipate lower future profitability. The sensitivity of prices to margin changes also depends on the industry and the overall economic environment.

As we will see later, it is above all the evolution of the gross margin, much more than its absolute level, which impacts the stock market performance of a company.

Sectors of activity and their characteristic margins

Each industry has characteristic gross margin levels, reflecting its operational and competitive specificities. Technology and pharmaceutical sectors traditionally have high gross margins, due to their investments in R&D and intellectual property. The distribution sector generally has lower margins, due to strong competition and high logistics costs. Heavy industry and construction are in an intermediate range, with margins varying according to the complexity of projects and added value.

When it comes to comparing company margins, it is therefore essential to do so within the same industries.

Backtest

To assess the effectiveness of this ratio in the Swiss and French markets, I performed a backtest from 2004 to 2024. Stocks were ranked by gross margin, from lowest to highest, and then divided into quintiles. I used gross margin data from the most recent half-year, as the results are slightly better than using margins from the previous twelve months. The process was repeated each year during the observation period, allowing for an in-depth analysis of the performance of each quintile.

I also analyzed gross margin growth by ranking it by quintiles, from lowest to highest. To do this, I used the growth of the last twelve months compared to the previous twelve months, which gave the most relevant results.

The results have been adjusted to take into account dividends, fractional shares and other corporate events that may influence stock value.

For the reasons explained above, gross margin and gross margin growth are used in comparison to peers within industries. Out of curiosity, I also ran a backtest against the overall market, but the results were not there, so I won't publish them here.

Backtest results

• Gross margin, best quintile CH: 10.76% (market 8.36%)
• Gross margin, best quintile F: 4.38% (market 3.06%)
• Gross margin growth, best quintile CH: 13,40% (market 8,36%)
• Gross margin growth, best quintile F: 5.52% (market 3.06%)

Lessons from the backtest

• Gross margin and gross margin growth work in both markets analyzed. Regardless of the country and the chosen indicator, the top-ranked stocks beat the market.
• Gross margin and gross margin growth perform better in the Swiss market than in France. This phenomenon was already observed with the other ratios studied.
• Gross margin growth works better than gross margin (note that the combination of the two does not give good results). Gross margin growth is also the best performing single ratio that we have studied so far in Switzerland (13.4% per year for the best quintile). In France it is still the dividend yield within the industries that works best with 7%/year.

I also backtested these ratios based on the capitalization of the companies. Unfortunately the results are not conclusive, with one exception: the gross margin of Swiss small and micro caps, which offers a very slight advantage (11.15% for the best quintile).

Conclusion

Gross margin remains a crucial indicator for measuring the performance of companies listed on the French and Swiss markets. However, it is above all its growth that significantly influences the evolution of stock prices. Gross margin is a relevant ratio for assessing the quality of a company. It would be wise to associate it with other qualitative or valuation indicators, as we have explored in previous articles in this series. We will address this topic in one of our next posts.