The financial services industry has served as common ground for investors seeking steady growth and income for decades, despite the 2008 economic downturn spurred by its mismanagement. Organizations that facilitate banking and insurance services, asset management services, lending and credit services, and brokerage operations make up a substantial portion of gross domestic product (GDP) each year, and they can have a lasting impact on total stock market performance.
Companies in the financial services industry have a strong history of consistency in return as well as steady dividend payments to investors, but not all companies within the sector are created equal. This can be seen in the wide range of profit margin from subsectors and specific companies. For example, although the average profit margin for the financial services industry may be 14.71%, the profit margin for the industry's more concentrated subsectors ranges from 5.1% to 40.5%.
To determine whether an investment in the financial services industry is suitable in terms of the tradeoff between risk and return, analyze the sector's management of cost by reviewing its profit margin. A company's profit margin is calculated by dividing a company's net income by its total revenues and is expressed as a percentage. Most investors view a higher profit margin as more desirable, while a lower percentage may mean a company is not generating enough revenue to cover its operating costs. Analyzing a company's profit margin is not the only way an investor can determine profitability, but this metric does provide more insight than a review of net earnings alone.
(For related reading, see "What's a Good Profit Margin for a Mature Business?")