By David Braverman All companies have something to sell. And while keeping tabs on the amount of total sales or revenues a company reports is important, it's essential to look at its profit margin.
Why? Revenues will show you how much money a company took in overall, but they're not necessarily the best indicator of the health of a company's business. It's what a company gets to keep that counts. Gross profit margin is an excellent indicator of how a company creates wealth through sales. (Gross profit is a company's net sales less the cost of goods sold.)
A company with a high gross profit margin -- gross profit divided by revenue -- has a strong ability to make money, which then can be reinvested into the company or paid out in dividends to investors.
How does a company achieve stellar gross margins? Pricing strength, for one thing. There are some products and services that customers are willing to buy, even if the price goes up. Operating efficiency is another factor.
The following 10 companies are ranked 5 STARS (buy) by S&P's equity analysts, and each has a gross profit margin of at least 50%. Additionally, each stock has provided a total return of at least 25% for the first half of 2001.
AOL Time Warner (AOL
Applied Materials (AMAT)
AT&T Liberty Media (LMG.A)
Bank of America (BAC)
Clayton Homes (CMH)
Braverman is senior equity analyst for Standard & Poor's