Disappearing Profit Margins

Everyone wants to know how much money a company makes — in other words, its profits. A company's profit dropping year to year is another clear sign of trouble.

Companies must report their profit results for the current year and the two previous years on their income statements, one of the three key financial statements that are part of the financial reports. (See Chapter 7 for more information about income statements.) When investigating a company's viability, looking at the past five years or more — if you can get the data — is a good idea.

Luckily, finding a company's historical profit data isn't hard. In the investor relations section on their Web site, most companies post financial reports for the current year and two or more previous years. The Securities and Exchange Commission (SEC) also keeps previous years' reports online at Edgar (www. sec.gov/edgar.shtml).

Any time you notice that a company's profit margins have fallen from year to year, take it as a clear sign that the company is in trouble. Research further to find out why, but definitely don't invest in a company with falling profit margins unless you get good, solid information about an expected turnaround and how the company plans to pull that off. To find out more about how to test whether a company is making a profit, turn to Chapter 11.

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