NEW YORK ( TheStreet) -- Compass Diversified Holdings (NYSE: CODI) has been downgraded by TheStreet Ratings from buy to hold. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including disappointing return on equity, poor profit margins and a generally disappointing performance in the stock itself.

Highlights from the ratings report include:
  • Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Diversified Financial Services industry and the overall market, COMPASS DIVERSIFIED HOLDINGS's return on equity significantly trails that of both the industry average and the S&P 500.
  • The gross profit margin for COMPASS DIVERSIFIED HOLDINGS is rather low; currently it is at 21.70%. Regardless of CODI's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, CODI's net profit margin of -1.60% significantly underperformed when compared to the industry average.
  • COMPASS DIVERSIFIED HOLDINGS reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, COMPASS DIVERSIFIED HOLDINGS reported poor results of -$1.23 versus -$0.84 in the prior year. This year, the market expects an improvement in earnings ($1.77 versus -$1.23).
  • CODI's debt-to-equity ratio is very low at 0.18 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.13, which illustrates the ability to avoid short-term cash problems.
  • The revenue growth came in higher than the industry average of 0.3%. Since the same quarter one year prior, revenues rose by 19.9%. Growth in the company's revenue appears to have helped boost the earnings per share.

Compass Diversified Holdings is a public investment firm specializing in acquiring controlling stakes in small to middle market companies. The firm seeks to make middle market and buyout investments. Compass Diversified has a market cap of $674.7 million and is part of the financial sector and financial services industry. Shares are down 20.6% year to date as of the close of trading on Monday.

You can view the full Compass Diversified Ratings Report or get investment ideas from our investment research center.
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