Benchmarking against your sector is the default move in financial management. You pull a median margin for your industry, compare, and draw a conclusion. We wanted to know how much that conclusion is actually worth, so we tested it against the full population of Latvian mid-market companies.
It turns out that knowing a company’s industry explains about five percent of why its profit margin is what it is.
The test
We used annual report open data published by the Latvian Register of Enterprises on data.gov.lv, covering fiscal year 2025. From it we took active companies reporting net revenue between €1 million and €10 million. They are large enough for the financial statements to carry real detail, and small enough to represent the country’s operating mid-market rather than its corporate tier. We removed the financial sector (NACE 64, 65, 66), holding and head-office entities (64.20, 70.10), and real estate (68). The last exclusion matters: at this revenue band, Latvian real estate companies are predominantly asset-holding vehicles rather than trading businesses, and leaving them in would have distorted the top of every ranking. We also dropped NACE 45 and 95, where two revisions of the NACE classification are mixed in the source data and the divisions are not comparable.
That left 5,622 companies across 38 NACE divisions, holding €16.5 billion of combined revenue and just over 151,000 employees. We computed medians and quartiles rather than averages, because a handful of extreme observations make the average meaningless here. We do not report divisions with fewer than 30 companies.
The median company earned 3.4% of revenue. A quarter of companies earned less than 0.4%, and a quarter earned more than 8.9%. But the median hides the shape of the distribution, and the shape is more interesting than the median.
Figure 1. Distribution of net profit margin, all 5,622 companies. Brass columns are loss-makers.
Nearly one in five, 19.6% or 1,102 companies, closed the year at a loss. At the same time, 22.1% earned more than 10% of revenue. Between those two groups sits a dense core: 20.7% fall inside the narrow 0–2% band.
This is a distribution with three parts, not one middle. There is a group earning well. There is a group losing money. And there is a large middle running at roughly break-even, which is to say enough to continue but not enough to accumulate anything. An average computed over this population describes none of the three.
Five percent
Sector medians do differ substantially. Accounting and legal services (NACE 69) post a median of 12.7%, while travel agencies (79) post 1.4%, a factor of nine. That looks like a clear hierarchy, which is exactly why sector comparison feels persuasive.
But when we ran a variance decomposition on company-level net margin, NACE division accounted for 5.1% of it. Group the divisions into ten broad economic sectors and the figure drops to 3.0%. The problem is not the level of detail, because roughly 95% of the variation sits between companies inside the same industry.
Figure 2. Margin dispersion across ten sectors. The bar covers the middle half of companies, with the median in brackets.
This is visible without any statistics. All 38 division medians together fit inside 11.3 points, from 1.4% to 12.7%. Eleven of the 38 divisions have an internal spread wider than the entire range across all 38 medians. Software development spans 15.4 points on its own, more than the distance between the most and least profitable sector in the country.
Across the ten divisions we examined closely, all 45 possible pairs overlap and none is cleanly separated. The median overlap is 4.7 percentage points, and 38 of the 45 pairs overlap by more than 3.
Put more concretely: 15.9% of accounting and legal firms earn less than the median travel agency. One in six companies in the most profitable sector on the list sits below the typical company in the least profitable one. In the other direction, 7.7% of travel agencies earn more than the median accounting firm, and a quarter of travel agencies out-earn the worst-performing quarter of accounting firms. Two industries nine times apart at the median overlap substantially in practice.
None of this makes industry irrelevant. It means industry sets the starting position rather than the outcome. Two companies in the same sector at the same revenue can sit at opposite ends of the distribution, and the reasons are not in the sector.
One number, two different businesses
Net margin alone also conceals the mechanism producing it. Gross margin is reportable for the 5,911 companies filing by function of expense, and the median gap between gross and net margin across divisions is 12.8 percentage points, distributed very unevenly.
Figure 3. Median gross and net margin, the 14 largest sectors, ordered by the gap.
In food service, a 22.9% gross margin becomes a 2.7% net margin, a gap of 20 points. In retail, 18.7% becomes 2.0%. In software development, 23.0% becomes 7.7%.
These businesses are not failing on price. Their gross margins are healthy, sometimes very healthy. Profit disappears below the gross line, in premises, staffing, administration and marketing. For a company in this position, raising prices is the least effective lever available. The problem is a cost base that does not scale down with revenue and therefore punishes any drop in volume.
Road transport is the mirror image: an 8.4% gross margin becomes 1.9% net, a gap of 6.5 points. Almost the entire cost base already sits above the gross line, in fuel, drivers and vehicle depreciation. Here margin is set by pricing and utilisation, and cutting administrative cost changes almost nothing, because there is very little there to cut.
Construction sits between the two. Building construction turns a 12.0% gross margin into 4.2% net, and specialised construction turns 16.9% into 5.5%. Gaps of 8 to 11 points mean overhead discipline matters without being decisive on its own. In construction both levers operate at once, which is a large part of why the sector is difficult to manage.
The practical consequence is direct. Two companies can report the same 2% net margin and need entirely opposite interventions. Net margin will not tell you which is which. Gross margin will.
Losses are not evenly spread
Figure 4. Share of companies closing fiscal year 2025 at a loss. The 12 highest and 6 lowest of 38 divisions.
The highest loss rates sit in energy and heat supply (38.7%), agriculture (33.1%) and sports and recreation (31.7%). The lowest is accounting and legal services at 4.5%.
The first two are capital-intensive sectors with a regulated or subsidised revenue side. The third has high fixed costs against volatile demand. What they share is not an industry but a structure: a heavy fixed cost base and limited ability to move price.
For an individual company, the useful reading is not where its own sector ranks here. It is that even in sectors with low loss rates, the bottom quarter runs close to zero. A healthy sector median protects nobody in particular.
What does predict margin
If not industry, then what? We tested the obvious candidates, computing Spearman correlations against net margin at company level.
Figure 5. Correlation with net profit margin, company level (n = 5,622).
Scale explains nothing: +0.02 against revenue, −0.07 against headcount. Capital intensity, measured as fixed assets over total assets, explains almost nothing either at −0.05. The intuition that asset-heavy businesses necessarily run thinner margins does not survive contact with the data.
Asset turnover correlates negatively at −0.23, which is what you would expect: a high-turnover business such as trade earns on volume rather than on margin. That is a choice of model, not a defect.
Two measures stand out, gross margin at +0.50 and equity ratio at +0.42. Both hold when we compare companies only against others in their own division, at +0.51 and +0.42 respectively.
Figure 6. Median equity ratio for companies grouped by net profit margin.
The equity relationship is strikingly monotonic. Loss-making companies carry a median equity ratio of 37%. Those earning 0–2% carry 44%. At 2–5% it is 55%, at 5–10% it is 64%, and above 10% it is 77%.
We checked whether this is an artefact of sector composition, and it is not. The same ladder appears inside individual divisions: wholesale runs from 36% to 80%, building construction from 30% to 73%, and road transport from 36% to 77%. The relationship is robust.
It is nonetheless a correlation, and the causality runs in both directions. Profitable companies retain earnings and accumulate equity, so part of the pattern is simply profit history showing up on the balance sheet. But the reverse pressure is real: a thinly capitalised company pays more for funding, absorbs less of a downturn, makes more decisions under duress, and is less able to walk away from a bad contract. One year of public data cannot separate the two, and we will not pretend otherwise.
Debt service, incidentally, is not a general problem at this scale. Median interest expense across the whole population is 0.04% of revenue. Only five divisions exceed 0.3%, namely agriculture at 2.95%, energy and heat supply at 0.80%, forestry at 0.62%, road transport at 0.41% and leasing at 0.35%. All five are land-heavy or plant-heavy. Leverage pressure in the Latvian mid-market is concentrated, not widespread.
A curiosity worth recording
Crop and animal production (NACE 1) reports a median gross margin of 0.8% and a median net margin of 4.8%, so net sits above gross. It is the only division in the dataset where that gap is negative.
The explanation sits in other operating income, which runs at a median 20.4% of revenue in that division against 0.32% across the rest of the population. These are predominantly EU support payments. The median Latvian farming company in this revenue band loses money on what it sells and is profitable on what it receives. A third of the division closed the year at a loss regardless, and it carries the heaviest interest burden in the dataset.
The practical consequence
None of this makes sector benchmarks useless. It makes them weak, considerably weaker than the confidence usually placed in them, and they are worth using with a clear sense of what they do not tell you.
A company at a 4% margin against a sector median of 5% has learned almost nothing. It is sitting inside a distribution whose middle half spans ten percentage points or more. The useful question is not whether you are near your industry’s median, but where you sit within your industry’s spread and what puts you there.
Three sharper questions follow from this data. What is your gross margin, and how does it compare within your sector, given that it predicts net margin roughly ten times better than industry membership does. How much of that gross margin survives to the bottom line, and is the gap in your sector typically wide or narrow, because that determines where effort is worth spending at all. And what is your equity ratio, since it is the one balance sheet measure that separates profitable from unprofitable companies consistently across this dataset.
None of those are answered by a benchmark. They are answered by the structure of the business itself.
Method note
All figures are medians. We do not report divisions with fewer than 30 companies. We do not show EBITDA: only 184 companies in this population file their income statement by nature of expense, which clears the reporting threshold in no division. Correlations are Spearman, with net margin clipped at ±50% so that extreme observations do not drive them. The data covers a single fiscal year, so no trend should be inferred from it.
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