I didn't intend to use The New York Times Co.'s (NYSE:NYT) earnings report to articulate a general investing lesson, but this is just too good to pass up. Fellow Fool Rich Duprey has written a couple of great, short tutorials on understanding margins and using them to analyze stocks. If you haven't already, read them here and here. Then print them out and refer to them every time you review the financials of your favorite company.

OK, back with me? Now that you know about margins, let's talk about the Times. The newspaper reported slightly lower net income, but higher revenues, highlighted by a 3.2% increase in advertising sales. That doesn't seem that bad, especially when you consider that it's been a pretty tough environment for the nation's papers of record. Bearing the weight of everything from circulation scandals to pressure from bloggers, media companies such as Belo (NYSE:BLC) and Dow Jones (NYSE:DJ) have seen declining earnings. And in a more extreme case, Chicago Sun-Times owner Hollinger (NYSE:HLR), whose misdeeds made headlines and offered investing lessons, hasn't earned a penny of profit since 2000, according to Morningstar.

That may be why investors are seeing good news in the Times' results, sending the stock higher by more than 1% as of this writing. And, really, why shouldn't they? After all, both advertising and circulation-based revenue was up.

Oh, if only it were that simple. Look deeper, and you'll see the Times admitted in its earnings release that expenses were also markedly higher. But this has also been going on awhile. Take a look at the Times' operating margins in the chart below.

Higher sales aren't bringing the Times any more money. Indeed, its per-share net profit was down to $1.96 for 2004, two cents lower than 2003's total. Such situations rarely make for good investments, and it's no different here. In fact, it could get even worse when you consider this terribly ironic statistic: Newsprint costs rose 7.5% in the fourth quarter. That's right: Publishing "all the news that's fit to print" has become an increasingly costly proposition. So, too, is any investment in the Times' stock at these levels.

This chart shows the operating margins at the Times since the fourth quarter of 2003:

Q4 04 Q3 04 Q2 04 Q1 04 Q4 03
Operating Margin 20% 11% 16% 14% 22%

For related Foolishness:

  • The Times still must ponder: To charge, or not to charge?
  • Blogs are booming. Which is your favorite?
  • Turns out newspapers aren't really black, white, and read all over.

Fool contributor Tim Beyers was a newspaper reporter too many years ago. But he never made it to the Times. Not surprisingly, he doesn't own shares in the Times or any of the other media companies mentioned in this story. To find out what's in his portfolio, check his Fool profile, which ishere. The Motley Fool has adisclosure policy.