Key Fundamentals: Sales, Margins, Return On Equity(8)

Profit Margins: Another Way To Assess Earnings Performance(3)

The rule of thumb for all companies except retailers: seek companies with annual pretax profit margins of at least 18%.

After-tax margins should be at all-time highs for the company or within 10% of the high.

Of course, increasing profit margins alone don't make for a good investment.

You need to keep an eye on all the key fundamentals, such as earnings growth.

Rising profit margins mean little if sales are dropping, unless there's a change in strategy and the company drops inefficient product lines, for example.

Also, if margins start trending lower, it could indicate the company is losing ground to competition.

One other note:

increasing profit margins aren't the same thing as increasing earnings, as we've shown with the above examples.

Suppose a company earns $10 million from $100 million in sales, resulting in a 10% profit margin.

The next quarter it earns $10 million from just $80 million in sales, for a 13% margin.

You see how a higher margin doesn't automatically mean bigger profits?