Is it a company with good growth rates and profit margins that sells well and retains profit well?
Connect YoY, QoQ, gross profit margin, operating profit margin, and net profit margin, and read the differences by business segment.
Table of contents
Remember this first
First, 3 things to remember
- 1Growth rate is the speed of increase, while profit margin is the portion remaining from revenue.
- 2Comparing with the same period last year and the previous quarter answers different questions.
- 3Read the margins by business segment and one-time factors hidden behind overall growth.
Distinguish between YoY and QoQ.
Growth rate is usually calculated as (current value ÷ comparison value −1) × 100. YoY compares with the same period last year, while QoQ compares with the previous quarter. For companies with strong seasonality, QoQ can fluctuate significantly due to holidays or year-end effects.
If revenue was 100, in the same quarter last year, 130, in the previous quarter, and 120 this quarter, the YoY is +20%, but the QoQ is approximately −7.7%. Neither is incorrect. If the comparison period is 0 or if there is a loss, standard growth rate calculations may lose meaning, so read the turnaround or loss reduction in monetary terms.
How much is left when revenue is 100?
Consider a hypothetical company with revenue of 100,, gross profit of 60,, operating profit of 30,, and net profit of 20. Profit margins are ratios obtained by dividing each profit by the revenue for the same period.
| Indicator | Results and takeaways |
|---|---|
| Gross profit margin | 60% · Product price, cost, and product mix |
| Operating profit margin | 30% · Operating expenses such as R&D and SG&A |
| Net profit margin | 20% · Reflecting interest, taxes, and other gains/losses |
Percent and percentage points
If the operating profit margin goes from 20% to 25%, it is a 5% percentage point (p) increase. Since the ratio itself has increased by 25% compared to the existing 20%, do not use the term “5% increase” interchangeably. Do not compare sales growth rates and margin changes as if they were the heights of the same bar.
Even if revenue increases from 100 to 120, if operating profit decreases from 20 to 18, the operating profit margin falls from 20% to 15%. Top-line growth may be masking price discounts, rising costs, or the burden of new investments.
Look at what was sold and to whom.
Breaking down revenue by product, region, or business segment reveals growth drivers and concentration risks. For a semiconductor company, this means checking demand cycles for data centers and consumer products, reliance on major customers, and supply contracts and inventory. Detailed classifications follow the standards actually disclosed by the company.
There is no guarantee that the business segment with the largest revenue share also has the largest profit contribution. The sum of segment profits may differ from consolidated profit due to head office expenses and internal transaction adjustments. Breaking down revenue growth from acquisitions, currency effects, and existing business growth helps in assessing sustainability.
Can the improvement in numbers be repeated?
Net profit margin can increase solely due to tax refunds or valuation gains on investment assets. Conversely, even if the operating profit margin decreases immediately due to R&D for new products, it may be spending for future growth. Do not conclude that it is good just because costs have decreased.
Review data based on the same criteria over multiple quarters and verify the causes through company explanations and cash flow. Even if growth slows, the stock price may rise if it is better than market expectations, and it may fall if it fails to meet expectations despite record growth.
You should not make such assumptions
“If revenue increases by 20%, profit also increases by 20%.”
Profit growth rates can differ significantly from revenue due to changes in price, cost, fixed costs, and taxes.
Check what you have read.
- Did you record the comparison periods for YoY and QoQ?
- Did you read the change in profit margin in %p?
- Did you look at major business and customer concentration?
- Did you separate one-time gains and losses?
Apply what you read to the actual screen
Try it on WAPE
Source and scope of verification
Reviewed · Version 1
- Financial Analysis TechniquesNew window
CFA Institute · Verify 2026-10-20
Limitations of financial ratios, DuPont analysis, and trend comparisons - Using Financial Statements to Evaluate Investment OpportunitiesNew window
FINRA · Verify 2026-10-20
Consolidation and comparison of financial statements and verification of disclosures - Beginners’ Guide to Financial StatementNew window
SEC · Verify 2026-10-20
Distinguishing between financial position, profit and loss, cash flow, and changes in equity.
This is educational material for observation and information comprehension. Hypothetical examples do not represent actual stocks or performance and do not provide buy or sell recommendations.