Sector-specific funds can provide investors an opportunity to diversify with a wide range of companies, including those operating under the umbrella of the forestry industry. This industry includes companies that manufacture forest products and engage in harvesting timber, producing lumber and logging, and their performances are not directly correlated to other broad asset classes. To determine whether the forestry sector is a suitable addition to an investor's portfolio, it is first necessary to analyze the sector's profitability. One of the most commonly used metrics to understand a company or sector’s profitability is the profit margin.
Calculating Profit Margin
To determine a company's revenues, investors can complete the calculation for its profit margin. This is done by subtracting a company's total expenses from its total sales and then dividing that number by total sales. Common stock dividends are not included in this calculation, but expenses including depreciation, taxes and interest costs are taken into account. The net profit margin is also beneficial for investors to know and is calculated by subtracting total expenses from total revenue (instead of sales) and then dividing that number by total revenue. The latter calculation provides investors a more detailed review of how companies convert bottom line revenue into shareholder profit.
Forestry Sector Profit Margin
As of January 2015, the forestry sector has a net profit margin of 14.5%. The average net profit margin of the sector includes large, mid and small cap company figures, including Deltic Timber Corporation (NYSE: DEL) with a net profit margin of 10.25%, Eco Building Products, Inc, (NYSE: ECOB) with a net profit margin of 60.76% and Plum Creek Timber Company, Inc. (NYSE: PCL) with a net profit margin of 16.27%.
Calculating the net profit margin is the most common tool current and potential investors can use in order to understand a company or sector's profitability and should be assessed prior to making an investment decision.