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Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D.

Vestis was profitable over the last five years but held back by its large cost base. Its average operating margin of 5.6% was weak for a business services business.

Analyzing the trend in its profitability, Vestis’s operating margin decreased by 2.6 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Vestis’s performance was poor no matter how you look at it – it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, Vestis generated an operating margin profit margin of 2.5%, down 1.9 percentage points year on year. This reduction is quite minuscule and indicates the company’s overall cost structure has been relatively stable.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Vestis, its EPS declined by more than its revenue over the last two years, dropping 48%. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

We can take a deeper look into Vestis’s earnings to better understand the drivers of its performance. Vestis’s operating margin has declined over the last two years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q3, Vestis reported EPS of negative $0.10, down from negative $0.02 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Vestis’s full-year EPS of negative $0.31 will flip to positive $0.09.

We enjoyed seeing Vestis beat analysts’ revenue expectations this quarter. On the other hand, its EPS missed. Overall, this was a softer quarter. The stock traded down 5.2% to $6.37 immediately after reporting.

Vestis’s latest earnings report disappointed. One quarter doesn’t define a company’s quality, so let’s explore whether the stock is a buy at the current price. The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free for active Edge members.