Relationship between Stock Profit Margins and other Factors

1. Capacity Utilization

If the capacity is in a normal range, higher capacity utilization improves the profit margin as the fixed cost is spread across more output units. (verified empirically)

If the capacity is already close to be fully utilized, there will be negative correlation. This is because the firms are forced to use less productive labors and machines in this case.

2. Unit Labor Costs

If the productivity is increased in tandem with the unit labor costs, the profit margin will be unchanged. However, if the productivity cannot catch up, unit labor costs will have negative correlation to the profit margin (verified empirically).

3. Inflation

Inflation has negative correlation to the profit because usually the firms won’t be able to pass the rise of input cost to the customers (verified empirically)

4. Foreign Trade

Foreign trade increases competition and thus reduces the ability to increase profit margin.