For investors, there is nothing better than a company with big, fat profit margins. If it isn't a one-off event and the margins consistently come in high year after year, then you may just have a winner on your hands.
That kind of company can generate more money than it needs to run its operations and can roll part of the earnings into developing the business without the need for heavy debt or capital raisings.
When it comes to competition, they also have an extra buffer of protection, which allows them to put more into marketing and product development to maintain their market lead. If the industry turns down, having those extra percentage points of margin may mean the difference between growing and being driven out of business.
Iron ore miner Fortescue Metals Group Limited (ASX: FMG) has benefited from higher iron ore prices, yet at the same time it has taken a hatchet to costs all along the production line. Wider profit margins have opened up, allowing it begin paying down its debt.
As it has achieved its production capacity expansion, associated capital expenditures will lessen, making more room for earnings. Over the last three years, its underlying net profit margins were on average over 20%. You can look forward to higher earnings potentially in the future as annual revenue may reach over $9 billion.
For internet-related companies, you might expect high margins from SEEK Limited (ASX: SEK), the employment website operator, and you wouldn't be disappointed. Since 2011, underlying net profit margins were an average 24.7%.
Larger revenues each year are filling the company with extra cash flow and now it is expanding overseas to keep that growth coming in. Its share price is up about 68% in the last 12 months.
Another company that has maintained fat profits is CSL Limited (ASX: CSL). Not only achieving underlying net profit margins of an average 22.4% in the last three years, the biopharmaceutical company also has very high returns on equity and capital. That shows it is the real deal when it comes to making money.
Foolish takeaway
By focusing on companies with above average profit margins, you have better chances of satisfactory returns. Also look for high returns on equity and invested capital. Altogether they show the company is getting the most out of its money and investments.
