Over the last six months, Karat Packaging’s shares have sunk to $23.25, producing a disappointing 6.7% loss - a stark contrast to the S&P 500’s 22.7% gain. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy Karat Packaging, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.

Why Is Karat Packaging Not Exciting?

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons you should be careful with KRT and a stock we'd rather own.

1. Lackluster Revenue Growth

Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Karat Packaging’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 4.2% over the last two years was well below its five-year trend.

2. EPS Took a Dip Over the Last Two Years

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Sadly for Karat Packaging, its EPS declined by 2.9% annually over the last two years while its revenue grew by 4.2%. This tells us the company became less profitable on a per-share basis as it expanded.

3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Karat Packaging has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5.9%, subpar for an industrials business.

Final Judgment

Karat Packaging isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 14.9× forward P/E (or $23.25 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

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