Even though Karat Packaging (currently trading at $30.89 per share) has gained 8.9% over the last six months, it has lagged the S&P 500’s 14% return during that period. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is KRT a buy right now? Or is its underperformance reflective of its business quality?

Why Does KRT Stock Spark Debate?

Founded as Lollicup, Karat Packaging (NASDAQ: KRT) distributes and manufactures environmentally-friendly disposable foodservice packaging solutions.

Two Things to Like:

1. Outstanding Long-Term EPS Growth

Analyzing the change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Karat Packaging’s full-year EPS grew at an astounding 27.3% compounded annual growth rate over the last three years, better than the broader industrials sector.

2. Increasing Free Cash Flow Margin Juices Financials

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Karat Packaging’s margin expanded by 18.5 percentage points over the last five years. The company’s improvement shows it’s heading in the right direction, and because its free cash flow profitability rose more than its operating profitability, continued increases could signal it’s becoming a less capital-intensive business. Karat Packaging’s free cash flow margin for the trailing 12 months was 11.2%.

One Reason to be Careful:

Revenue Growth Flatlining

We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Karat Packaging’s recent history shows its demand slowed significantly as its revenue was flat over the last two years.

Final Judgment

Karat Packaging’s positive characteristics outweigh the negatives. With its shares trailing the market in recent months, the stock trades at 9.3x forward EV-to-EBITDA (or $30.89 per share). Is now a good time to initiate a position? See for yourself in our in-depth research report, it’s free.

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