The electronics sector can provide an investment portfolio substantial growth opportunities. This diverse sector includes telecommunications, networking gear, electronic components, consumer electronics, semiconductors and other electronics. As of January 2020, the average profit margin for companies in the electronics sector was 5.7%.
Profit margin is net income divided by total revenue. 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 costs compared with its rivals. If the company loses money, this ratio has little use.
The electronics sector is characterized by a large number of companies with negative earnings. The distribution of profit margins for the electronics sector is highly skewed due to the presence of a few significant 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 note is the presence of non-recurring items in the an electronics company's earnings. Companies often discontinue operations or receive large one-time payments, boosting their profit margins. These items are not expected to recur in the next period, causing a subsequent drop in profit margin. Analysts usually exercise caution and look for non-recurring items to ensure that future profit margin is sustainable.