What is 'Segment Margin'

Segment margin is the amount of profit or loss produced by one component of a business. With large companies, just knowing the gross margin for the entire business is not always enough. Knowing the segment margins for each division of the company that generates both expenses and revenues provides a more accurate picture of where the company is creating the most value and where its strengths and weaknesses lie. Analyzing segment margin can be useful for determining the vulnerability of a company's overall gross margins.

BREAKING DOWN 'Segment Margin'

For example, an athletic shoe company might report its profit margin for the company as a whole. To provide greater detail, it could report segment margins — the profit margins for different components of the business, such as women's shoes, men's shoes, children's shoes and athletic accessories. If the company has multiple locations, it could also report the segment (geographic) margins for its Seattle stores, its Chicago stores and its Philadelphia stores. If it appears as if one business segment is doing exceptionally well and driving positive performance while the rest of the company is struggling, this might affect how analysts view the company and its valuation. Its valuation might be lower compared to another company where the gross margins are equal but are being driven evenly by all business segments. The valuation of a company with only one high performing segment may be even further compromised if that segment is expected to shrink in the future due to technological shifts or other headwinds.

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