Profitability ratios

Margins tell you how much of each riyal of revenue survives each layer of cost. Reading them as a cascade tells you where profitability is won or lost:

• Gross margin — pricing and buying power (revenue less cost of goods sold).
• EBITDA margin — after the operating cost base: staff, rent, marketing.
• EBIT (operating) margin — after depreciation and amortization, the cost of the store estate and systems.
• Net margin — after interest and tax: what's left for shareholders.

Plotted on one axis from zero, the cascade is visible at a glance: the gap between the gross and EBITDA lines is the operating cost base (28.0% of revenue in FY2025), and the gap between EBITDA and net margin is D&A, interest and tax. All three lines slope down.

Turning margins into decisions. A margin becomes actionable when you translate it back into riyals. On FY2025 revenue of 1,497.0, each percentage point of EBITDA margin is worth SAR 15.0m. Had Rawdah earned the peer-median EBITDA margin of 13.1%, its EBITDA would have been SAR 196.1m instead of SAR 187.1m. That gap of about SAR 9.0m is the prize a cost review would target, and the cascade says where to look: operating costs, not pricing.

A practitioner's sequence.

1. Compute the cascade for each year.
2. Find the layer where the margin moved most, and the layer where the gap to peers opens.
3. Explain it with business drivers: price, mix and buying terms for gross margin; rent, staff and marketing for operating costs; store investment for D&A; borrowing for interest.
4. Remove one-off items before concluding (see Normalising earnings).

Edge cases. Lease accounting matters for retailers: under IFRS 16 most store rent is recorded as depreciation and interest rather than as an operating expense, which lifts the EBITDA margin without changing the business, so compare companies on the same basis. And no margin says how much capital the profit needed; that is the job of returns, the next lesson.