Margins matter. The more Energy Conversion Devices (Nasdaq: ENER) 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 Energy Conversion Devices's competitive position could be.

Here's the current margin snapshot for Energy Conversion Devices and some of its sector and industry peers, and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Energy Conversion Devices

6.1%

(30.8%)

(204.5%)

 First Solar (Nasdaq: FSLR)

47.3%

30.4%

27.5%

 Trina Solar (NYSE: TSL)

30.4%

19.5%

14.6%

 Applied Materials (Nasdaq: AMAT)

37.1%

10.4%

6.3%

 Suntech Power Holdings (NYSE: STP)

20.2%

11.0%

5.3%

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

Unfortunately, that table doesn't tell us much about where Energy Conversion Devices 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 Energy Conversion Devices 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 56.6% and averaged 32.5%. Operating margin peaked at 27.7% and averaged (4.2%). Net margin peaked at 32.1% and averaged (0.6%).
  • Fiscal year 2009 gross margin was 31.1%, 140 basis points worse than the five-year average. Fiscal year 2009 operating margin was 8.0%, 1,220 basis points better than the five-year average. Fiscal year 2009 net margin was 3.9%, 450 basis points better than the five-year average.
  • TTM gross margin is 6.1%, 2,640 basis points worse than the five-year average. TTM operating margin is (30.8%), 2,660 basis points worse than the five-year average. TTM net margin is (204.5%), 20,390 basis points worse than the five-year average.
  • LFQ gross margin is 2.0%, 2,960 basis points worse than the prior-year quarter. LFQ operating margin is (25.9%), 3,310 basis points worse than the prior-year quarter. LFQ net margin is (531.5%), 53,340 basis points worse than the prior-year quarter.

With recent 12-month-period operating margins below historical averages, Energy Conversion Devices 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. 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.

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. First Solar and Suntech Power Holdings are Motley Fool Rule Breakers picks. Try any of our Foolish newsletters today, free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.