The chemicals sector consists of a diverse group of companies that operate in different industries, such as specialty chemicals, diversified chemicals, agricultural chemicals and synthetics. The sector offers an attractive addition to an investment portfolio due to its stable growth potential. One metric that analysts commonly use to evaluate the company's profitability is profit margin. In April 2015, the average profit margin for companies with positive earnings in the chemicals sector was approximately 9%.
The profit margin is defined as net income divided by total revenues. Financial professionals frequently use profit margins to compare companies within the same industry or sector. Companies with higher profit margins usually command higher valuations and demonstrate a stronger grasp on cost management compared to their peers. If the company generates losses, this metric is not useful.
The chemicals sector is characterized by a large number of firms with positive earnings. In April 2015, the profit margin ranged from 0.2% for Kraton Performance Polymers to 34% for Terra Nitrogen. The average profit margin is slightly skewed toward the high range due to a presence of a few large outliers, such as Terra Nitrogen. Analysts often supplement the average with the median profit margin. In April 2015, the median profit margin for companies with positive earnings was approximately 7.4%.
One thing to remember with profit margins is the presence of non-recurring charges and profits. Chemical companies often discontinue their operations or receive a one-time large payment, boosting their profit margin. However, such expenses and profits are unlikely to recur in the future, causing a subsequent drop in the profit margins.