Margins matter. The more BHP Billiton (NYSE: BHP) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong BHP Billiton's competitive position could be.

Here's the current margin snapshot for BHP Billiton and some of its sector and industry peers, and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 BHP Billiton

76.9%

31.6%

20.7%

 Southern Copper (NYSE: SCCO)

56.2%

46.8%

29.3%

 Freeport-McMoRan Copper & Gold (NYSE: FCX)

55.3%

46.3%

21.2%

 Newmont Mining (NYSE: NEM)

62.7%

42.7%

20.9%

 Cliffs Natural Resources (NYSE: CLF)

30.1%

25.5%

15.3%

Source: Capital IQ, a division of Standard & Poor's.

Unfortunately, that chart doesn't tell us much about where BHP Billiton has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for BHP Billiton over the past few years.


(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 75.3% and averaged 70.9%. Operating margin peaked at 41.7% and averaged 36.4%. Net margin peaked at 28.1% and averaged 23.1%.
  • Fiscal year 2009 gross margin was 75.3%, 440 basis points better than the 5-year average. Fiscal year 2009 operating margin was 35.2%, 120 basis points worse than the 5-year average. Fiscal year 2009 net margin was 11.6%, 1,150 basis points worse than the 5-year average.
  • TTM gross margin is 76.9%, 600 basis points better than the 5-year average. TTM operating margin is 31.6%, 480 basis points worse than the 5-year average. TTM net margin is 20.7%, 240 basis points worse than the 5-year average.
  • LFQ gross margin is 35.4%, 450 basis points worse than the prior year quarter. LFQ operating margin is 34.2%, 560 basis points worse than the prior year quarter. LFQ net margin is 24.6%, 1,590 basis points better than the prior year quarter.

With recent 12-month-period operating margins below historical averages, BHP Billiton has some work to do. There may be some hope in the last quarter's results, but only time will tell.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. By keeping an eye on the health of your companies' margins, you can spot potential trouble early, or figure out whether the numbers merit Mr. Market's enthusiasm or pessimism. Let us know what you think of the health of the margins at BHP Billiton in the comments box below. Or, if you're itching to learn more, head on over to our quotes page to view the filings directly.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.