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A careful analysis of a company’s profit margins is a good way to better understand the quality of that company and its management. In the BetterInvesting Stock Selection Guide (SSG), a company’s pre-tax profit margins are used to measure the consistency of a company’s fundamental performance over time.

The profit margin is sometimes known by other names, including % pre-tax profit on sales in Section 2A of the SSG, and Avg 5Yr PTI (%) in MyStockProspector.com. “Income” and “profit” can be used interchangeably, so the average five-year pre-tax income percentage MyStockProspector.com is actually the same value that you’ll find in Section 2A of the SSG, just with a different name.

I often use profit margins as a shorthand way to describe the same figure, meaning the pre-tax profit margin as used in our tools.

In MyStockProspector.com, there are several ways to screen using profit margins to find companies with outstanding profitability metrics.

In the Quality field list group, you can screen on:
   • Avg 5Yr PTI (%). The 5- year average percentage pre-tax income to sales as in Section 2A of the Stock Selection Guide.
   • Trend PTI. The trend of the 5-year % pre-tax profit as seen in Section 2A of the SSG, on a visual scale from steadily upward (++) to Even to steadily downward or erratic (--).
   • PTI Rating. The same as the Trend PTI, but expressed numerically, with 6 being steadily upward, 3 being Even, and 0 being steadily downward or erratic.

Because profit margins vary considerably by industry group, it is usually not very useful to screen on absolute values, such as looking for companies with Avg 5Yr PTI greater than 25%. That’s why you can use the Industry Average feature to identify companies that have 5-year profit margins greater than the average of each company’s industry group.

You can use this feature in MyStockProspector.comto find companies with above-average profit margins.

First, select the Avg 5Yr PTI (%) field from the Quality group.

Next, right click in the “minimum” box of the Avg 5Yr PTI (%) field, and select Ind Avg -Current Field from the popup box.

Only companies that have 5-year profit margins that exceed the average 5-year profit margins of their own industry group will pass the criteria. Go ahead and finish setting up your criteria and report, knowing that these companies have better quality attributes over the past five years then companies that don't pass the screen.

You can use the Industry Average – Current Field feature on any criteria you create in either the minimum or maximum entry box. You might search for companies with P/E Ratios below the average P/E Ratio of their industry groups, for instance. Or you could use it on the PTI Rating field above, which is one reason that this criteria exists in addition to the selector boxes used in the Trend PTI field. Searching for companies with Section 2A trends that are greater than the average of their own industry group is another way to refine your list of candidates. (Note: if the industry average pre-tax margin trend is down or erratic, it’s possible that companies with less than desirable trends would still pass your screen.)

I think this is one of the best ways to identify quality companies, and no other screening tool online has this capability!

 - DOUG GERLACH

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