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Fire Your Stock Analyst!: Analyzing Stocks on Your Own by Harry Domash

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Analyzing Margins

While gross margins can be useful for detecting deterioration in a company’s competitive position, and profit margins are a key ingredient in the target price calculation, I’ve found operating margins the most useful of the three measures for evaluating a company’s profitability trends.

For instance, Table 11-11 shows communications equipment provider Black Box Corporation’s operating margin history, as it appeared in May 2000.

Table 11-11. Black Box Corporation’s operating margin.
PeriodQ 3/00Q 3/99FY 3/00FY 3/99FY 3/98FY 3/97
Operating margin15.8%20.5%16%19%19%19%

Black Box’s operating margin held at a steady 19 percent through fiscal 1999. However, it dropped to 16 percent in its fiscal year ending March 1999. That amounts ...

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