Marginal Performance at New Oriental Education & Technology Group

Margins matter. The more New Oriental Education & Technology Group (NYSE: EDU) 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 New Oriental Education & Technology Group's competitive position could be.

Here's the current margin snapshot for New Oriental Education & Technology Group and some of its sector and industry peers, and direct competitors.

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

Unfortunately, that table doesn't tell us much about where New Oriental Education & Technology Group 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 New Oriental Education & Technology Group 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 61.9% and averaged 60.6%. Operating margin peaked at 22.6% and averaged 18.2%. Net margin peaked at 24.4% and averaged 18.7%.
• Fiscal year 2010 gross margin was 61.9%, 130 basis points better than the five-year average. Fiscal year 2010 operating margin was 20%, 180 basis points better than the five-year average. Fiscal year 2010 net margin was 20.1%, 140 basis points better than the five-year average.
• TTM gross margin is 61.9%, 130 basis points better than the five-year average. TTM operating margin is 20%, 180 basis points better than the five-year average. TTM net margin is 20.1%, 140 basis points better than the five-year average.
• LFQ gross margin is 58%, 140 basis points better than the prior-year quarter. LFQ operating margin is 4.2%, about the same as the prior-year quarter. LFQ net margin is 6.7%, 230 basis points better than the prior-year quarter.

With recent 12-month-period operating margins exceeding historical averages, New Oriental Education & Technology Group looks like it is 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. 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 New Oriental Education & Technology Group 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.