The Gross Margin score is an indicator that tells you what the growth and stability of the Gross Margin (Marx) has been over the past eight years.
Gross Margin (Marx) growth is the eight-year Gross Margin (Marx) geometric average growth. This value is then compared to all companies in the screener’s investment universe and assigned a score from 1 to 100 with 1 being companies with the highest Gross Margin (Marx) growth score.
Gross Margin (Marx) stability is calculated as the eight-year average Gross Margin (Marx) divided by the eight-year gross margin (Marx) standard deviation. Similarly this value is then compared to all companies in the screener’s investment universe and assigned a score from 1 to 100 with 1 being companies with the highest Gross Margin (Marx) stability score.
If a score cannot be calculated the company gets a value of 50.
The Gross Margin Score is the highest of Gross Margin (Marx) growth or the Gross Margin (Marx) stability score.
This is done as explained in the book to compare two companies, one with very high profit margin growth, while the other has very stable profit margins. This allows you to rank stocks on their best metric, growth or stability.
We got the idea for this ratio from the great book Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors by Wes Gray and Tobias Carlisle. Gross Margin (Marx) is the best company quality ratio we have ever tested. See separate definition of the Gross Margin (Marx).
How to use the ratio
Available as a screening ratio: No
Available as an output column ratio: Yes
The ratio can only be selected as a column and can be found under Quality ratios and indicators.
The lower the better
The Gross Margin score is a number between 1 and 100 (1 is good 100 is bad) that is calculated based on the Gross Margin (Marx) growth and stability over the past 8 years.
The more stable the Gross Margin (Marx) and the higher its growth has been over the past 8 years the lower the Gross Margin Score will be.
To select the best companies sort the column from low to high. Or you can also add a filter in the column to only show the lowest companies.
More information
The Gross Margin (Marx) is the best company quality ratio we have ever tested. You can read more about the test here: Have you been using the wrong quality ratio? The Gross Income ratio.
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