Expanding margins: quality's quiet criterion

2026-07-07 · By Lubin Danilo, founder of Lubin Investment

A company whose margins expand year after year gets more profitable without necessarily selling more: each extra dollar of revenue costs less and less to produce. It's one of the ten criteria in my method, and it often reveals more than a margin level frozen in time.

Key takeaways

An expanding margin means a company's revenue is growing faster than its costs, year after year.
This criterion differs from the margin level at a given moment: an already-high margin that's flat isn't the same as a modest margin improving every year.
Roper Technologies, which I've analyzed on my site, passes this criterion with margins that expand year after year thanks to its vertical software model with low marginal cost.
Omnicom, by contrast, fails this criterion: its margins are flat, a sign of limited pricing power in a labor-intensive services business.

The margin level doesn't tell the whole story

When I analyze a company, I never just look at its margin at a single point in time. A 30% margin that's been flat for five years tells a different story than a 30% margin that was 20% five years ago. The first suggests a ceiling has been reached, the second an ongoing dynamic that could continue.

That's why one of my ten criteria specifically checks whether a company's operating margin is expanding over five years, not just its raw level today.

Why margins expand (or don't)

An expanding margin usually comes from what economists call operating leverage: part of a company's costs are fixed (software already built, factories already constructed, management teams), and when revenue grows without those fixed costs rising at the same pace, each extra dollar of revenue generates more profit than the last.

Conversely, a flat or compressing margin can come from competition preventing price increases, a business that requires hiring at the same pace as growth (no operating leverage), or a loss of bargaining power against customers or suppliers.

The Roper Technologies case: operating leverage in action

Roper Technologies, which I've analyzed on my site, is an excellent example of this mechanism. The company owns a portfolio of niche vertical software (highly specialized software for specific industries): once a piece of software is built, each additional customer costs very little to serve. The result: its net margin comes in at 21.1% and keeps expanding, driven by revenue growth that doesn't require proportional investment.

The Omnicom case: when operating leverage doesn't exist

Omnicom, the advertising group I've also analyzed on my site, illustrates the opposite case. It's a skilled-labor business: producing one more ad campaign usually requires hiring more creative staff, with little to no structural operating leverage. Its margins haven't expanded over five years, a sign consistent with limited bargaining power against demanding advertiser clients and constant competitive pressure, without that being a sign of a bad company.

How I use this criterion in my method

This criterion never condemns a company on its own. A flat margin in a labor-intensive service business (consulting, advertising, some financial services) is almost structural, whereas the same stagnation at a software publisher or a business with strong scale effects would be a real warning sign. What I look for is consistency between the business model and what the numbers actually show over five years.

What I take away from this

Checking whether a margin is expanding, not just its level, helps spot companies whose business model reinforces itself with growth, rather than simply growing bigger without gaining efficiency. It's one of the ten criteria I apply systematically, precisely because it reveals a dynamic the margin level alone never shows.

FAQ

What is an expanding margin?

It's an operating margin that widens year after year, meaning a company's revenue grows faster than its costs.

Why is this criterion different from the margin level?

A high margin that's been flat for 5 years tells a different story than a more modest but steadily improving margin, which suggests an ongoing dynamic.

Why are Roper Technologies' margins expanding?

Thanks to its niche vertical software model: once built, each additional customer costs very little to serve, a classic example of operating leverage.

Why aren't Omnicom's margins expanding?

It's a skilled-labor business where producing more ad campaigns usually requires hiring more staff, with little structural operating leverage.

Does a flat margin always mean a bad company?

No, it depends on the business model. In a labor-intensive service business, a stable margin can be normal rather than alarming.

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About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).