Margin of Safety

Posted in Finance, Accounting and Economics Terms, Total Reads: 1974

Definition: Margin of Safety

Margin of Safety is the difference between the actual revenue made from Sales and the breakeven sales revenue expressed in percentage terms.

Formula: (Actual sales revenue - Breakeven sales revenue) x 100 ÷ Actual sales revenue.

Example: The actual sales revenue of a company = Rs.10000

Breakeven sales revenue of a company = Rs.2000

Its margin of safety will be: (10000-2000) x 100 ÷ 10000 = 80%

The company has 80% margin of safety which means that even if the revenue of the company falls by 80%, still the company will run in profits.

Another Definition in the stock market context is that Margin of Safety is the difference between the intrinsic value of a stock and its market price where intrinsic value is assumed to be more than the market price.

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