Margins matter. The more Ceragon Networks (Nasdaq: CRNT) 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 Ceragon Networks's competitive position could be.

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

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Ceragon Networks

33.8%

3.9%

4%

 Cisco Systems (Nasdaq: CSCO)

64.4%

22.2%

18.3%

 Harris (NYSE: HRS)

36.1%

18%

10.8%

 Motorola (NYSE: MOT)

35.5%

5.2%

1.8%

 Alvarion (Nasdaq: ALVR)

43.5%

(6%)

(8.1%)

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

Unfortunately, that chart doesn't tell us much about where Ceragon Networks 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 Ceragon Networks 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 38.5% and averaged 33.3%. Operating margin peaked at 7.7% and averaged 2.5%. Net margin peaked at 12% and averaged 2.4%.
  • Fiscal year 2009 gross margin was 33%, 30 basis points worse than the five-year average. Fiscal year 2009 operating margin was 1.4%, 110 basis points worse than the five-year average. Fiscal year 2009 net margin was 2%, 40 basis points worse than the five-year average.
  • TTM gross margin is 33.8%, 50 basis points better than the five-year average. TTM operating margin is 3.9%, 140 basis points better than the five-year average. TTM net margin is 4%, 160 basis points better than the five-year average.
  • LFQ gross margin is 35.3%, 330 basis points better than the prior-year quarter. LFQ operating margin is 6.2%, 660 basis points better than the prior-year quarter. LFQ net margin is 4.3%, 370 basis points better than the prior-year quarter.

With recent 12-month-period operating margins exceeding historical averages, Ceragon Networks looks like it's doing fine.

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. To stay ahead, learn more about how I use analysis like this to help me uncover the home run stock you're too afraid to buy.

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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. Ceragon Networks is a Motley Fool Hidden Gems pick. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.