Margins matter. The more Red Hat
Here's the current margin snapshot for Red Hat over the trailing 12 months: Gross margin is 83.7%, while operating margin is 17.7% and net margin is 13.3%.
Unfortunately, a look at the most recent numbers doesn't tell us much about where Red Hat 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, 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 Red Hat over the past few years.
Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.
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. To compare quarterly margins to their prior-year levels, consult this chart.
Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.
Here's how the stats break down:
- Over the past five years, gross margin peaked at 84.8% and averaged 84.1%. Operating margin peaked at 16.0% and averaged 14.0%. Net margin peaked at 15.0% and averaged 13.0%.
- TTM gross margin is 83.7%, 40 basis points worse than the five-year average. TTM operating margin is 17.7%, 370 basis points better than the five-year average. TTM net margin is 13.3%, 30 basis points better than the five-year average.
With recent TTM operating margins exceeding historical averages, Red Hat looks like it is doing fine.
- Add Red Hat to My Watchlist.
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. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
More from The Motley Fool
3 Growth Stocks to Buy and Hold for 25 Years
These tickers will serve you well for decades to come.
How Red Hat, Inc. Stock Rose 72% in 2017
This is Enterprise Software Sales 101, executed at an elite level.
Red Hat, Inc. Smashed the Street Again -- With Cash to Spare
Buybacks and buyouts notwithstanding, Red Hat makes more cash profits than absolutely necessary. But don't expect a dividend policy anytime soon.