Reviewing Margin Trends
On the Stock Selection Guide, the 10-year history of a company’s pre-tax margins is displayed, with particular emphasis on the figures from the last five years. The intent is to provide insight into the trend of margins over time, especially by comparing the average five-year profit margin to the value from the latest fiscal year.
Are the margins relatively stable? This is an indication of a well-run business.
Are the margins wildly erratic? This can be a sign of turmoil in a company’s operations.
Are the margins declining? Management may not be doing a good job handling increases in raw material costs, labor rates, marketing expenses, or be facing competition that’s driving down prices.
Are the margins increasing? Very occasionally, companies can be found that have hit their stride and are maximizing their resources particularly well. Although every company aims to attain “economies of scale” as they grow, it’s not every business that can actually achieve these gains in productivity and expansion of their margins.
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