Does small-cap Scientific & Technical Instruments company Schmitt Industries have a sustainably profitable business model? By studying its gross margins and comparing them to its operating margins, we can gain insight into quality of its business. With gross margins at 51.2%, you might be telling yourself the Schmitt Industries is profitable -- but there is more to the story.
Gross margins take into account only the cost of revenue, meaning the expenses directly related to each sale. So it's important to also look at operating margins, which take into account overhead costs. One way to look at it is that gross profit gives insight into Schmitt Industries's market and the viability of its business model. Operating margins, on the other hand, show you how efficiently the company is implementing this business model.
| Date Reported | Revenue ($) | Cost of Revenue ($) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-05-31 | 9,893,210.0 | 4,824,639.0 | 51.23 | 38.95 |
| 2021-05-31 | 5,600,459.0 | 3,535,778.0 | 36.87 | -20.79 |
| 2020-05-31 | 4,189,924.0 | 2,239,376.0 | 46.55 | 24.47 |
| 2019-05-31 | 4,729,442.0 | 2,960,680.0 | 37.4 | n/a |
Since Schmitt Industries's cost of revenue is growing at an average 45.5% per year, while its total revenues have a 33.0% growth rate, the only explanation for the widening margins is that the company is increasing its prices. Since prices cannot be increased indefinitely, Schmitt Industries's gross margin growth will eventually slow unless it can get its cost of revenue under control.
| Date Reported | Total Revenue ($) | Operating Expenses ($) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-05-31 | 9,893,210.0 | 20,509,096.0 | -107.3 | 36.09 |
| 2021-05-31 | 5,600,459.0 | 15,003,492.0 | -167.9 | -222.7 |
| 2020-05-31 | 4,189,924.0 | 6,369,846.0 | -52.03 | -67.57 |
| 2019-05-31 | 4,729,442.0 | 6,198,010.0 | -31.05 | n/a |
The table above tells us that, on average, Schmitt Industries has not been profitable over the last four years, which should be a warning sign to prospective investors. Indeed, the company's operating margins are sinking at rate of -84.7%
