The electronics sector offers an attractive addition to a portfolio because it provides strong growth opportunities. The electronics sector is very diverse and includes semiconductors, technical instruments, circuit boards, photographic equipment, communication devices and other electronic and computer equipment. Profit margin is one of the most widely used metrics for evaluating a company's profitability. In April 2018, the average profit margin for companies in the electronics sector was approximately 6.7%.
The profit margin is the net income divided by the total revenues. Analysts often use this metric to compare companies in similar industries or sectors. A higher profit margin shows a particular company has a good grasp on its costs compared to its rivals. If the company loses money, this ratio has little use.
The electronics sector is characterized by a large number of firms with negative earnings. The distribution of profit margins for the electronics sector is highly skewed due to a presence of a few large outliers, making the average profit margin a misleading metric. Instead, analysts often use the median profit margin ratio to get a sense of profitability for a typical electronics company.
Another thing to keep in mind is the presence of non-recurring items in the electronics companies' earnings. Companies often discontinue their operations or receive large one-time payments, boosting their profit margins. In the next period, these cash flows are not expected to occur, causing a subsequent drop in the profit margin. Analysts usually exercise caution and look for non-recurring items to ensure the profit margin is sustainable in the future. (For related reading, see "What Is the Electronics Sector?")