Q: Are companies with low profit margins bad investments? – C.R., Vineland, Colo.
A: Not necessarily. Fat profit margins are generally preferable, as they often reflect competitive advantages (such as a strong brand that commands a higher price). Still, you needn't avoid lower-margin businesses. Instead, look at the whole picture.
Imagine, for example, that the Laverne Brewery Inc. (ticker: DEFAZ) has a whopping net profit margin of 25%, while Shirley Beer Co. (ticker: FEENY) has just a 2% margin. But if Laverne sells only three cases of beer a year, while Shirley sells thousands, Shirley is the better buy, generating more total profit.