As investors we want to own shares in companies that become more valuable over time. But what makes one company more valuable than another?

Theoretically speaking, a company’s value is equal to the sum of its future earnings discounted back to today’s value. This means that a company’s value is most likely to be affected by:

  • How much of its product or service the company can sell (revenue)
  • How much of that revenue the company can keep (profits)
  • What returns, in the form of future profits, the company can get on money they invest back into the business (returns on invested capital)

A company that can grow revenue faster, keep more of that revenue as profits, and get higher returns on their investments in the business is more valuable than a company that cannot. But the essence of capitalism means that situations like this are rare.

If a company or sector is seeing high levels of growth or profitability, other companies will want a slice. And if there is nothing to protect the companies already profiting, this influx of competition will drive excess returns over the cost of capital in the sector towards zero.

If a company can defy capitalism and achieve high profits and returns on capital for a long time, there is likely a structural reason for it. At Morningstar we call this a moat. Not all companies with high profit margins have moats and not all moated companies have high profit margins. But their presence for a long time is a clue worth following.

High margins also make it easier for a firm to achieve better returns on investments made into the business. This becomes clear when you break down common ratios used to measure these returns. As an example, a company’s return on equity is calculated as follows:

Return on equity = Net Profit Margin (net profit after tax/revenue) x Asset Turnover (revenue/total assets) x Leverage (total assets/shareholders equity)

The higher a company’s net profit margin, the less weight falls on the other components to deliver good returns for shareholders.

Today we’re going to look at two ASX shares that have enjoyed high profit margins for several years. What’s more, our analysts think the companies currently trade below Fair Value. Before we get onto the shares, though, let’s look at the three main measures of profit.

The three main measures of profit

  • Gross Profit is revenue minus the direct costs of producing the goods or providing the services being sold. Direct costs will include the cost of materials and labour used to produce the goods being sold or costs necessary to provide a service. There may also be a charge to represent past investments made in things like machinery and software, which will show up as a depreciation or amortisation charge. If a firm sells software, gross profit can be a good portion of the firm’s revenue because limited material and labour costs can be assigned to the product itself. What constitutes a direct cost is debatable and companies will often include different costs here. As a result, comparing the gross profitability of two firms can be problematic.
  • Operating Profit takes gross profit and subtracts other costs involved in a company’s core operations. Key here are costs incurred in selling the product or service (like salesperson salaries, rent costs, marketing and admin). There may also be additional depreciation and amortisation charges related to buildings, equipment and software bought previously. Operating profits are a cleaner way to compare two companies because there is less flexibility for what costs are included– it represents everything bar interest, tax and non-operating costs. As a result, it also cuts out the effects of different financial structures and tax rates.
  • Net Profit takes operating profit and subtracts or adds the following: interest expenses or income, estimated tax payments and non-operating costs or profits – for example from a minority equity investment.

Dividing the gross, operating or net profit by revenue will give you a profit margin expressed as a percentage. Because more costs are included each time, the margin will normally get lower as you work your way down. Today we are most interested in net margins, which is the percentage of sales kept as profit after all costs are considered.

CSL (CSL)

  • 3-year average net profit margin: 19%
  • Moat rating: Narrow
  • Star Rating on May 7 2025: Four stars

CSL’s main business is the sale of immunoglobulin and other treatments derived from plasma.

CSL is one of three Tier 1 players in this space that command around 80% of the global plasma market. A key facet of the Tier 1 players’ dominance is their vertically integrated nature, from collection to processing and sales. CSL, for example, has invested so heavily in this regard that it now owns around 30% of the world’s plasma collection centres.

CSL and its Tier 1 peers Grifols and Takeda have long achieved far higher profit margins than smaller players for a couple of reasons. For one, many of the costs associated with the collection and production are fixed, meaning that they become more efficient and profitable with higher volumes. CSL’s collection footprint also reduces the need to purchase plasma on the open market at far higher prices.

Taken together, this allows the bigger players like CSL to keep significantly more profit from each sale than smaller competitors with higher costs can. And despite margins in the Behring segment being crimped by post-pandemic plasma shortages, CSL’s average net margin for the past three years still comes in at a handy 19%.

Our analyst Shane Ponraj thinks CSL can grow its revenue at an average of 8% per year over his forecast period, led by strong demand for immunoglobulin. He also thinks that CSL can grow its market share modestly due to its competitive advantages over smaller players. Shane thinks the shares are worth $325 each.

Deterra Royalties (DRR)

  • 3 year average net margin: 63.9%
  • Moat Rating: Wide
  • Star Rating on May 7: Four stars

Deterra Royalties was spun out by Iluka Resources in 2020. Its major asset is a royalty agreement covering Western Australia’s Mining Area C, which serves as the core of BHP’s iron ore operations.

Deterra’s high profit margins are down to its capital light business model. After all, Deterra does not own or operate mines. As an owner of royalty and streaming agreements, it simply cashes cheques from miners on the other end of those contracts.

This does not require much in the way of staff or equipment. As of its 2024 annual report, Deterra had 11 employees at the last account and operating expenses of $13 million in fiscal 2024 versus revenue of $240.5 million. Once taxes were paid, this resulted in a net profit margin of around 64%.

Deterra’s long-term strategy is to diversify its portfolio of royalties and reduce its reliance on Mining Area C and iron ore. The acquisition of Trident Royalties last year, which brought precious metal and lithium assets into the mix, kickstarted this process. But it still has a long way to go.

As a result, Deterra’s earnings outlook for the foreseeable future will be dominated by 1) iron ore prices and 2) BHP’s production levels in MAC.

Our mining analyst Jon Mills’ Fair Value estimate for Deterra assumes an average iron ore price of USD 95 per ton from 2025-2027, based on recent futures curve prices, and a midcycle price of USD 72 per ton based on his estimate of iron ore’s marginal cost of production.

Jon’s mid-cycle iron ore price forecast is a lot lower than recent prices of around USD 105 per ton, but even then he thinks that Deterra could offer value for long-term investors. At a recent market price of $3.65, the company traded around 15% below Jon’s Fair Value estimate.

Remember: Before you get to choosing investments, we recommend you form a deliberate investing strategy. You can read more about how to form your strategy here.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.