As you can see, depreciation is not something to be dismissed lightly simply because it is a non-cash outlay. It's a legitimate factor in measuring a company's economic performance. Hence you should give serious attention to Gross and Operating Margins, which do reflect the depreciation charges. But if you want to measure a company's financial flexibility, as opposed to economic success, it would be reasonable for you to ignore depreciation and examine the EBITD margin.

The operating margin showed us the impact of such normal corporate expenditures as overhead; all companies have overhead and differences reflect the extent to which overhead acts as a drain on sales dollars. Pretax Margin goes beyond overhead and reflects non-operating costs that are not regularly related to the running of the business or the maintenance of the corporate entity. Examples would be interest on debt, gains and losses from asset sales, income from corporate investments that are unrelated to its business, etc. Net Margin tells us what percent of each sales dollar has been brought to the bottom line after subtracting all costs, or any kind.

All else being equal, high margins are better than low margins. For the most part, this principle will apply when you compare company margins to industry margins. But be careful about comparing company margins to S&P 500 margins (and, to a lesser extent, Sector margins). When you do that, all else is often not equal. Turnover must also be considered. For example, the average net margin for furniture manufacturers is approximately 8%, while retail grocery chains, on average, command net margins that are a bit shy of 2.5%. If investors were to look only at margins, nobody would want to own shares of a grocery chain. But grocers typically buy large quantities of inventory, sell the products very quickly, and repeat the process by frequently reordering goods. Newly manufactured furniture sells much more slowly. In other words, a new sofa will fetch a bigger margin than will a can of soup. But the sofa will tie up far more of the seller's capital (during the manufacturing period and for the time when it is held by the seller as finished goods inventory) than will the can of soup. So which business is more profitable?

Fortunately for investors, there is another set of ratios that can reduce both considerations to a single number. We refer, here, to Returns on Capital, which can be studied in the Market Guide Management Effectiveness Report.

Before leaving the Profitability Ratios, we must consider one more data item. The tax rate, shown at the bottom of this table, can provide important signals about earnings quality. Watch out for unusually low tax rates. They may be caused by issues that aren't likely to persist over time, such as carryforwards from prior year's losses that will eventually be exhausted. In such a case, when the tax rate moves toward a more "normal" level, EPS may will decline even if the business fundamentals are improving.