Moneyzine
Contents
/Investment Guides /Revenue Margin of Safety (Sales Margin of Safety)

Revenue Margin of Safety (Sales Margin of Safety)

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
November 6th, 2024
Advertiser Disclosure

Definition

The term revenue margin of safety refers to a calculation the investor-analyst can use to determine how much revenues can decline before the break-even point is reached. The revenue margin of safety is important to understand when a company has relatively few, but large, customers.

Calculation

Revenue Margin of Safety = (Revenues - Revenue Break-Even Point) / Revenues

Where:

  • The revenue break-even point is equal to operating expenses divided by gross margin.

Explanation

Also known as the sales margin of safety, the revenue margin of safety tells the investor-analyst if a company will experience financial distress if they lose a large contract with a customer. The calculation is used to determine how far revenues can fall before the company reaches its revenue break-even point, which is the level of revenues necessary to remain profitable.

The investor-analyst can compare the revenue margin of safety value to the revenues provided by the company's largest customers. Some companies depend on relatively few, but large, contracts with customers. For example, a company in the semiconductor industry might supply personal computer or smart phone manufactures with chips used in their devices. The loss of one of these large accounts might be the difference between profitability and a loss in such a capital intensive industry.

Example

Company A's current revenues are $9.000 million, with operating expenses of $2.638 million and a 35% gross margin. The table below shows the company's break-even point.

Break-Even Analysis (000s)
Current Revenues$9,000
Operating Expenses$2,638
Gross Margin35%
Break Even Point$7,537
Maximum Profit Potential$512

Note: The maximum profit potential is derived by subtracting the break-even point from current revenues and dividing that value by the gross margin percentage.

Based on the above information, Company A's revenue margin of safety would be (values in millions):

= ($9.000 - $7.537) / $9.000 = $1.463 / $9.000, or 16.3%

This means if Company A were to lose 16.3% of its revenue, then it would reach its break-even point. This can be proven as shown below.

= $9.000 x 16.3% = $1.436

If we lower Company A's revenues by $1.436 million, the break even table would be as follows:

Current Revenues$7,537
Operating Expenses$2,638
Gross Margin35%
Break Even Point$7,537
Maximum Profit Potential$0

Related Terms

discretionary costs to sales ratio, foreign exchange ratio, interest expense to debt ratio, overhead rate, goodwill to assets ratio, overhead to cost of sales ratio, investment turnover ratio, revenue break-even point, operating assets ratio, gross profit index

Explore Investing Further

  • Trading has never been easier, thanks to the rise of online platforms that enable you to buy and sell various assets at the click of a button. But with so many options available, it can be challenging to decide which platform is right for you.
  • Looking for a way to avoid swap fees while trading forex?
  • By providing instant diversification for your portfolio, investing in ETFs can amplify the potential of any investor, novice or seasoned alike. We scoped the market to curate a list of the best ETF trading platforms available for US investors.
  • Our top beginner's pick for copy trading is eToro. Read on for more details, plus seven good alternatives.
  • Swing trading stocks can be a great way for investors to take advantage of short-term stock market movements and gain significant returns. If you're interested in swing trading, the key to success lies in selecting the right stocks to buy and sell quickly for a profit.
  • The table below lists the best stock picks under $2, listed on public exchanges.
  • The table below lists the best stock picks under $1, listed both on public and OTC exchanges.
  • This section will highlight the best EV-trading penny stocks available in the United States.
  • The demand for sustainable energy has grown rapidly in recent years. This has resulted in increased scrutiny of the automotive market. As a result, the electric vehicle (EV) industry has made significant advancements.
  • Intelligent Bio Solutions Inc. is a life sciences company, founded in 2016 with headquarters in New York and is engaged in performing diagnostic tests, real-time monitoring, and non-invasive surgery for its patients. The firm has developed a CoV-2 Biosensor, which can be used in RNA virus detection.
  • Hour Loop was founded in 2013 with headquarters in Redmond, Washington. It’s an online retailer involved in e-commerce in the United States that hit the public markets on Jan 7th of 2022. The company sells home/garden decor, electronic products, kitchenware, and apparel through walmart.com, amazon.com, and hourloop.com.

Related Content

  • Biden Or Trump: Who Is Better For The Economy And Stocks?
    Yup. This is one of those articles. It's an election year, and here in the U.S., we get to decide which old dude who’s been alive long enough to remember when there were only 48 states in the U.S. will be the leader of the free world.
    March 19th, 2024
  • When it comes to strategic business planning, accounting is front and center, shaping the course of action. At least it should be.
    March 14th, 2024
  • How To Invest in Real Estate Without Becoming a Landlord
    We all know that in order to build wealth and prepare for retirement, investing is the key. However, it can be hard to figure out what to invest in and how to put your money to good use. One of the most talked about ways to build wealth is owning property and being a landlord to bring in passive income. But what if you don’t want to do that? You can still invest in real estate!
    November 15th, 2024
  • Investing In Nature: The Closest You'll Get To Your Money Growing On Trees
    ESG (Environmental, Social, and Governance) has become a polluted word for many traders and investors - but that doesn't mean it's going completely away. Nor does that mean you can't profit from nature or sustainable practices. But there are some opportunities in the regenerative ag, conservation, and green real estate spaces.
    February 29th, 2024
  • How to Invest $100 and Grow it to 6 Figures
    Turning $100 into six figures is a goal no one should realistically have. But it's the question you might ask yourself: Can it be done? Sure. Probable? It's less probable than winning the lottery, but technically still probable - like finding a needle in a haystack the size of Canada. But possible? Absolutely.
    October 29th, 2024

Contributors

Moneyzine Editor
The Moneyzine editorial team consists of writers and content specialists with diverse backgrounds.
Moneyzine 2024. All Rights Reserved.