What is margin of safety?

Margin of safety is a concept in finance that refers to the difference between the actual or expected return on an investment and the break-even point or target return. It is a measure of the cushion or buffer that an investor has to absorb potential losses before the investment becomes unprofitable.

Margin of safety is often used in the analysis of financial statements or investment decisions to assess the risk of an investment. It helps investors determine the level of risk they are willing to take and provides a safety net in case the investment does not perform as expected.

To calculate the margin of safety, one typically determines the difference between the current value of an investment and its intrinsic value or fair market value. This can help investors assess whether an investment is overvalued or undervalued, and whether there is sufficient room for error in their investment decision.

Overall, having a margin of safety in an investment provides a level of protection against unforeseen events or market downturns, and can help investors make more informed and calculated investment decisions.