Margins matter. The more Electronic Arts (Nasdaq: ERTS) 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 Electronic Arts' competitive position could be.

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

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Electronic Arts

53.8%

-5.5%

-9.1%

 Microsoft (Nasdaq: MSFT)

80.2%

39.5%

30%

 Shanda Games (Nasdaq: GAME)

59.5%

34.9%

30%

 Shanda Interactive Entertainment (Nasdaq: SNDA)

70%

35.5%

26.8%

 BMC Software (Nasdaq: BMC)

78.1%

26.6%

21.7%

Source: Capital IQ, a division of Standard & Poor's. TTM = Trailing 12 Months

Unfortunately, that table doesn't tell us much about where Electronic Arts 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 Electronic Arts 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 60.8% and averaged 54%. Operating margin peaked at 12.2% and averaged (3.2%). Net margin peaked at 8% and averaged (9.3%).

• Fiscal year 2010 gross margin was 48.9%, 510 basis points worse than the five-year average. Fiscal year 2010 operating margin was (14.9%), 1,170 basis points worse than the five-year average. Fiscal year 2010 net margin was (18.5%), 920 basis points worse than the five-year average.

• TTM gross margin is 53.8%, 20 basis points worse than the five-year average. TTM operating margin is (5.5%), 230 basis points worse than the five-year average. TTM net margin is (9.1%), 20 basis points better than the five-year average.

• LFQ gross margin is 73.1%, 2,290 basis points better than the prior-year quarter. LFQ operating margin is 12.9%, 4,880 basis points better than the prior-year quarter. LFQ net margin is 11.8%, 4,810 basis points better than the prior-year quarter.

With recent 12-month-period operating margins below historical averages, Electronic Arts 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 Electronic Arts 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. Microsoft is a Motley Fool Inside Value choice. Shanda Interactive Entertainment is a Motley Fool Rule Breakers recommendation. Electronic Arts is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.