Margin of safety with Implications of Margin of Safety

Margin of Safety:

Margin of safety represents the strength of the business. It enables a business to know what is the exact amount it has gained or lost and whether they are over or below the break-even point. Margin of safety=(Current output-BEP)

Implications of Margin of Safety:

A) In the point of application to investing:

1. Using margin of safety, one should buy a stock when it is worth more than its price on the market.

2. The margin of safety protects the investor from both poor decisions and downturns in the market.

3. A common interpretation of margin of safety is how far below intrinsic value one is paying for a stock.

B) In the point of application to accounting:

In investing parlance, margin of safety is the difference between the expected sales level and the break-even sales level. It can be expressed in the equation from as follows:

Margin of Safety = Expected/Actual Sales Level – Breakeven sales Level.