Compass Diversified (CODI)

Private equity firm Compass Diversified (NYSE:CODI) fell short of the market’s revenue expectations in Q4 CY2024, but sales rose 13.8% year on year to $620.3 million. Its non-GAAP profit of $0.62 per share was 9.6% above analysts’ consensus estimates.

Company Overview

Operating with a permanent capital structure unlike traditional private equity funds, Compass Diversified (NYSE:CODI) is a private equity firm that acquires, manages, and grows middle-market businesses across various industries.

Diversified financial services encompass specialized offerings outside traditional categories. These firms benefit from identifying niche market opportunities, developing tailored financial products, and often facing less direct competition. Challenges include scale limitations, regulatory classification uncertainties, and the need to continuously innovate to maintain market differentiation against larger competitors expanding their offerings.

Compass Diversified competes with other publicly traded private equity and holding companies such as Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), Liberty Media (NASDAQ:LSXMA), and Icahn Enterprises (NASDAQ:IEP), as well as traditional private equity firms like Blackstone (NYSE:BX), KKR (NYSE:KKR), and Apollo Global Management (NYSE:APO).

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Luckily, Compass Diversified’s revenue grew at a decent 7.7% compounded annual growth rate over the last five years. Its growth was slightly above the average financials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within financials, a half-decade historical view may miss recent interest rate changes and market returns. Compass Diversified’s recent performance shows its demand has slowed as its revenue was flat over the last two years. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

This quarter, Compass Diversified’s revenue grew by 13.8% year on year to $620.3 million but fell short of Wall Street’s estimates.

Revenue growth is one major determinant of business quality, and the efficiency of operations is another. For Diversified Financial Services companies, we look at pre-tax profit rather than the operating margin that defines sectors such as consumer, tech, and industrials.

The pre-tax profit margin includes interest because it's central to how financial institutions generate revenue and manage costs. Tax considerations are excluded since they represent government policy rather than operational performance, giving investors a clearer view of business fundamentals.

Over the last two years, Compass Diversified’s pre-tax profit margin has risen by 2.3 percentage points, going from 1.9% to 4.2%. Said differently, the company’s expenses have grown at a slower rate than revenue, which typically signals prudent management.

Compass Diversified’s pre-tax profit margin came in at 5% this quarter. This result was 11.4 percentage points better than the same quarter last year.

Revenue trends explain a company’s historical growth, but the long-term 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.

Compass Diversified’s EPS grew at an astounding 49.8% compounded annual growth rate over the last five years, higher than its 7.7% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Compass Diversified, its two-year annual EPS growth of 9.2% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q4, Compass Diversified reported adjusted EPS of $0.62, up from $0.53 in the same quarter last year. This print beat analysts’ estimates by 9.6%. Over the next 12 months, Wall Street expects Compass Diversified’s full-year EPS of $2.25 to grow 5%.

Return on equity, or ROE, tells us how much profit a company generates for each dollar of shareholder equity, a key funding source for banks. Over a long period, banks with high ROE tend to compound shareholder wealth faster through retained earnings, buybacks, and dividends.

Over the last five years, Compass Diversified has averaged an ROE of 1%, uninspiring for a company operating in a sector where the average shakes out around 10%.

The debt-to-equity ratio is a widely used measure to assess a company's balance sheet health. A higher ratio means that a business aggressively financed its growth with debt. This can result in higher earnings (if the borrowed funds are invested profitably) but also increases risk.

If debt levels are too high, there could be difficulties in meeting obligations, especially during economic downturns or periods of rising interest rates if the debt has variable-rate payments.

Compass Diversified currently has $1.86 billion of debt and $1.3 billion of shareholder's equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 1.5×. We think this is safe and raises no red flags. In general, we’re comfortable with any ratio below 3.5× for a financials business.

It was good to see Compass Diversified beat analysts’ EPS expectations this quarter. On the other hand, its revenue slightly missed. Overall, this print had some key positives. The stock remained flat at $7.31 immediately following the results.

Updated: November 14, 2025 at 11:36 PM EST

Are you wondering whether to buy Compass Diversified or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Compass Diversified isn’t a terrible business, but it isn’t one of our picks. Although its revenue growth was decent over the last five years and Wall Street believes it will continue to grow, its relatively low ROE suggests management has struggled to find compelling investment opportunities.

Compass Diversified’s P/E ratio based on the next 12 months is 2.4x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $14 on the company (compared to the current share price of $5.79).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.