Margin of Safety Calculator

The basis of the margin of safety calculation is subtracting your breakeven point from your sales (current or estimated). You can represent your margin of safety in a few ways— in dollars, as a ratio, and as a percentage. Let’s take a look at how to calculate each. You can also use the calculator on this page to get all three.

Let’s take a closer look at the margin of safety formula in action and calculate it for two businesses. 

The Wooden Spoon Company: Q4 Review

The Wooden Spoon Company makes the best wooden spoons in Indiana. They sold 6,000 wooden spoons in Q4 and spent $17 producing each spoon, making their breakeven point $102,000. They price their product at $24 a spoon, which means their current sales are $144,000.

Their margin of safety in dollars is $42,000
$42,000 = $144,000 – $102,000

Their margin of safety as a ratio is 0.29:
0.29 = ($144,000 – $102,000) / $144,000

And their margin of safety as a percentage is 29%: 
29% = [($144,000 – $102,000) / $144,000] x 100

So the Wooden Spoon Company had a healthy margin of safety during Q4 and can rest assured that sales were well managed during this period. 

The Wooden Spoon Company: Q1 Forecasting

Now the Wooden Spoon Company is projecting profits for Q1. The cost of materials has fluctuated recently, and they expect utility costs to rise during the winter months. They project that the total cost to produce each spoon will now be $19.50. They also anticipate selling only 4,500 spoons this quarter, making their new breakeven point $87,750. If they keep their price the same, their estimated sales are $108,000. 

Their margin of safety in dollars is $20,250
$20,250 = $108,000 – $87,750

Their margin of safety as a ratio is 0.19:
0.19 = ($108,000 – $87,750) / $108,000

And their margin of safety as a percentage is 19%: 
19% = [($108,000 – $87,750) / $108,000] x 100

The Wooden Spoon Company can see they’re headed toward rocky ground. Leadership must now decide how to resolve this issue, and they have many options. They could choose to use less expensive materials, change their product pricing, or introduce a more profitable product line to offset the lower profitability of their current product line. They could come up with a different strategy to grow their profitability. The main point is that, by making sales projections, they can identify a rough patch before it occurs and take action early. 

Your margin of safety is an important guide for high-level decision-making and business strategy development. A negative or low margin of safety demands action. The business has a small buffer between operating at a profit and operating at a loss. Leadership can cut costs, increase sales, or increase prices to widen the margin. A high margin of safety indicates a resilient business with good performance and protection against changes in sales or forecasting errors. It may indicate a good time to reinvest those earnings to drive future growth and revenue.

A business’s breakeven point is when gains and revenue equal the cost of producing those gains or revenue. If it costs $100 to produce and sell a good, then the breakeven point is $100 in revenue.

A business’s margin of safety represents the difference between profits and the breakeven point. Using the previous example, if that same business makes $135 in revenue, there is a difference of $35 between profits and the breakeven point. That puts the margin of safety at about 26 percent, which is generally considered healthy. 

In the investing world, these terms are a bit different. Investors want to purchase stock in a company where the market price is lower than the intrinsic value. There are many ways to calculate the intrinsic value of a business. Every investor will have ideas about how to do so.

Finally, for options investors, the breakeven point usually refers to the original price of the stock at the time it was purchased plus the cost of buying an option.