Margins matter. The more American Dairy (NYSE: ADY) 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 American Dairy’s competitive position could be.

Here's the current margin snapshot for American Dairy and some of its sector and industry peers and direct competitors.


TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 American Dairy




 Mead Johnson Nutrition Company (NYSE: MJN)




 Kraft Foods (NYSE: KFT)




 Dean Foods (NYSE: DF)




 Synutra International (Nasdaq: SYUT)




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

Unfortunately, that table doesn't tell us much about where American Dairy 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 American Dairy 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 48.2% and averaged 43.8%. Operating margin peaked at 21.2% and averaged 14.7%. Net margin peaked at 16.6% and averaged 10.4%.
  • Fiscal year 2009 gross margin was 48.2%, 440 basis points better than the five-year average. Fiscal year 2009 operating margin was 9.6%, 510 basis points worse than the five-year average. Fiscal year 2009 net margin was 7.2%, 320 basis points worse than the five-year average.
  • TTM gross margin is 36.3%, 750 basis points worse than the five-year average. TTM operating margin is (8.2%), 2,290 basis points worse than the five-year average. TTM net margin is (12.4%), 2,280 basis points worse than the five-year average.
  • LFQ gross margin is 35.4%, 2,310 basis points worse than the prior-year quarter. LFQ operating margin is (34.8%), 5,210 basis points worse than the prior-year quarter. LFQ net margin is (39.4%), 5,790 basis points worse than the prior-year quarter.

With recent TTM operating margins below historical averages, American Dairy has some work to do.

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 American Dairy 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 newsletter services free for 30 days. The Motley Fool has a disclosure policy.