Breaking Down Karat Packaging Inc. (KRT) Financial Health: Key Insights for Investors

You're looking at Karat Packaging Inc. (KRT) and seeing a classic mixed signal: strong top-line growth but a real squeeze on profitability, which is a story every investor needs to break down right now. The company just posted a record Q3 2025 net sales of $124.52 million, a solid 10.4% jump year-over-year, which shows demand for their disposable foodservice products is defintely robust. But here's the quick math: net income for the quarter dropped to $7.33 million from $9.09 million a year ago, and the gross margin compressed significantly to 34.5%.

That dip is a direct result of rising import costs and tariffs, which spiked to 14.4% of net sales in Q3 2025, nearly double the prior year's rate. So, the question isn't about sales volume anymore; it's whether management's move to scale a new paper bag business-targeting $100 million in annual sales within two years-and their new $15 million stock repurchase program can offset these structural margin pressures. We need to map out if this is a temporary trade headwind or a long-term profit ceiling, and what clear actions you should take with your position.

Revenue Analysis

You need to know if Karat Packaging Inc. (KRT)'s top-line growth is sustainable, and the answer is yes, but the source of that growth is shifting. The company is defintely delivering on its double-digit growth promise in 2025, but the story is less about broad market tailwinds and more about strategic wins and a critical product mix shift.

Karat Packaging Inc.'s primary revenue stream comes from its core business as a specialty distributor and manufacturer of disposable foodservice products, with a major emphasis on its eco-friendly Karat Earth® product line. The growth you see isn't just price inflation; it's driven by genuine volume increases and a favorable product mix as customers opt for higher-margin, environmentally friendly items. This focus on eco-friendly products is a smart move that capitalizes on government bans on non-biodegradable materials.

Looking at the quarterly numbers for 2025, the momentum is clear. Here's the quick math on the year-over-year (YoY) net sales growth:

The company's trailing twelve-month (TTM) revenue as of September 30, 2025, hit $453.78 million, an increase of 8.93% from the prior TTM period. Management is maintaining its full-year 2025 guidance for double-digit sales growth, which shows confidence in their Q4 outlook.

Drilling into the channels, the 'Chains and distributors' category saw a solid 7.1% YoY increase in Q1 2025. But the 'Online' channel, while a growth driver, is showing a slowdown, with its YoY growth rate decelerating from a sharp 19.6% in Q1 2025 to a more modest 3.1% in Q3 2025. Regionally, the company is seeing double-digit growth in key markets like Texas and California. That's a strong signal about market share gains in high-volume areas. You should also check out Exploring Karat Packaging Inc. (KRT) Investor Profile: Who's Buying and Why? for context on who is betting on these trends.

The most significant near-term change is the new paper bag category, a result of a major contract with a national chain. This single new business is projected to add approximately $20 million in annual revenue once fully ramped, with a potential to scale to over $100 million in additional annual revenue over the next two to three years. This is a material growth lever that diversifies their product mix beyond traditional foodservice disposables.

Your action item here is simple: Finance: Re-model the 2026 revenue forecast to explicitly include the $20 million paper bag contract, and factor in the deceleration of the Online channel growth rate.

Profitability Metrics

You want to know if Karat Packaging Inc. (KRT) is still a profit engine, especially with all the talk about tariffs and supply chain headaches. The short answer is yes, they are, but the margins are getting squeezed. Their profitability remains strong relative to the broader packaging industry, but the trend line is pointing down in the near term, which is the critical thing to watch.

The most recent data from the third quarter of 2025 (Q3 2025) shows Karat Packaging Inc. generated $124.5 million in net sales, but the cost pressures are clearly visible in the margins. Here's the quick math on their core profitability:

• Gross Margin: 34.5%. This is the pure product-level profit, and it's down from 38.6% a year ago.
• Operating Margin: 6.6%. This shows what's left after covering sales, general, and administrative (SG&A) costs.
• Net Profit Margin: 6.1%. This is the bottom-line profit, translating to $7.6 million in net income for the quarter.

That 6.1% net margin is defintely still solid, but it's a drop from the 8.2% reported in the prior-year quarter.

Operational Efficiency: The Tariff Headwind

The main story here is the cost of goods sold (COGS), which is where operational efficiency lives. The gross margin trend is the clearest signal of the pressure. It fell from 39.6% in Q2 2025 to 34.5% in Q3 2025. Why the sharp drop? Higher import costs, primarily from duties and tariffs, rose to a staggering 14.4% of net sales in Q3 2025, up from 8.6% a year earlier.

This isn't just bad luck; it's a structural headwind they have to actively manage. The management team is fighting back by diversifying their supply chain, which is a clear, actionable move. They ramped up U.S. sourcing to 20.4% of their supply mix in Q3 2025, a significant jump from 14.6% in the prior quarter. Plus, the new paper bag business, which is projected to add about $20 million in annual revenue, should help diversify their product mix and margin profile.

KRT's Margins vs. Industry Benchmarks

To be fair, Karat Packaging Inc. is still outperforming its peer group on a gross profit basis. They are a specialty distributor, not a pure-play commodity manufacturer, so their margins should be higher. But even against relevant benchmarks, their Q3 2025 performance is strong:

The takeaway is simple: Karat Packaging Inc. has a superior gross margin profile, suggesting strong pricing power or a more favorable product mix than average. But still, the Q4 2025 guidance projects the gross margin to tighten further to a range of 33% to 35%. The margin is resilient, but the pressure is real.

This is a story of strong top-line growth battling rising input costs. Your next step should be to understand the customer base driving that revenue growth. You can dive deeper into the customer side by Exploring Karat Packaging Inc. (KRT) Investor Profile: Who's Buying and Why?

Debt vs. Equity Structure

Karat Packaging Inc. (KRT) maintains a conservative capital structure, relying far more on equity and internal cash flow than on debt to fund its operations and growth. As of the most recent data, the company's Debt-to-Equity (D/E) ratio sits comfortably below the industry average, signaling a low financial risk profile for investors.

You want to see a company that can grow without being crushed by interest payments. Karat Packaging is defintely in that sweet spot.

Current Debt Snapshot (Q3 2025)

Looking at the September 2025 quarter, Karat Packaging Inc. (KRT)'s total debt is manageable, largely comprising long-term obligations. This is the kind of balance sheet that allows for flexibility, especially when economic conditions get choppy. The total debt load is approximately $46.9 million, which is a very modest figure relative to the company's size.

Here's the quick math on the composition of that debt:

• Short-Term Debt & Capital Lease Obligations: $11.6 million
• Long-Term Debt & Capital Lease Obligations: $35.3 million

The company also noted in its Q3 2025 earnings call that it plans to pay down an existing loan upon maturity using cash on hand, which reinforces their commitment to keeping debt low.

Debt-to-Equity Ratio and Industry Comparison

The Debt-to-Equity (D/E) ratio is your key measure of financial leverage, showing how much debt a company uses to finance its assets relative to the value of shareholders' equity. For Karat Packaging Inc. (KRT), this ratio is remarkably low. Using the most recent figures-total debt of $46.9 million (Q3 2025) and Shareholders' Equity of $162.71 million (Q2 2025)-the calculated D/E ratio is approximately 0.29 (or 29%).

This is a strong position, especially when you compare it to the industry. The average Debt-to-Equity ratio for the broader U.S. Packaging & Containers industry is significantly higher at around 1.46 as of November 2025. Karat Packaging Inc. (KRT)'s ratio is less than a fifth of the industry benchmark, indicating a much lower reliance on external borrowing and a greater capacity to weather economic downturns than its peers.

Balancing Debt and Equity Funding

Karat Packaging Inc. (KRT)'s financing strategy clearly favors equity and cash flow over new debt, but they actively manage both sides of the ledger. In June 2025, the company raised capital through an equity issuance-a secondary offering of 1.5 million shares priced at $27.00 per share. This move increased the equity base, providing non-debt funding for growth initiatives like its new paper bag category, which is projected to add about $20 million in annual revenue.

However, the board also approved a $15.0 million share repurchase program in November 2025, which is a direct action to return capital to shareholders and slightly reduce the equity base. This buyback signals management's confidence that the stock is undervalued and is a common action for companies with low leverage and strong cash generation. This balanced approach-raising equity for growth, but also actively managing the share count-is a sign of mature capital allocation. For a deeper dive into who is buying and selling, check out Exploring Karat Packaging Inc. (KRT) Investor Profile: Who's Buying and Why?

Liquidity and Solvency

You need to know if Karat Packaging Inc. (KRT) can cover its near-term bills, and honestly, the numbers for the 2025 fiscal year look solid. Liquidity is the company's ability to meet its short-term obligations, and KRT shows a healthy position, but you need to look past the headline ratio to see the full picture.

Current and Quick Ratios

The best way to gauge immediate financial strength is with the current and quick ratios. The current ratio (current assets divided by current liabilities) tells you how many dollars of assets KRT has for every dollar of debt coming due within a year. The quick ratio (or acid-test ratio) is a tougher test, stripping out inventory-which can be slow to convert to cash-to see the true cash-like position.

For Karat Packaging Inc., the most recent data shows a strong buffer:

• Current Ratio: Approximately 2.14. This means KRT has $2.14 in current assets for every $1.00 of current liabilities.
• Quick Ratio: Approximately 1.09. This shows KRT has $1.09 in highly liquid assets for every $1.00 of current liabilities, even without selling a single cup or container from inventory.

A quick ratio above 1.0 is defintely a green flag, suggesting that even if sales suddenly stalled, they could still pay their immediate debts comfortably. That's a strong position for a distributor like KRT, whose business relies heavily on inventory management.

Working Capital and Cash Flow Trends

Working capital (Current Assets minus Current Liabilities) is the engine room of day-to-day operations. As of the second quarter of 2025, Karat Packaging Inc. reported working capital of $116.8 million. However, the TTM (Trailing Twelve Months) change in working capital as of November 2025 was a negative -$5.794 million. This isn't necessarily bad; sometimes a negative change means the company is paying down liabilities or efficiently managing inventory, but it's a trend to monitor, especially with their focus on expansion, which you can read more about in their Mission Statement, Vision, & Core Values of Karat Packaging Inc. (KRT).

Here's the quick math on their cash flow movements for the TTM period ending in mid-2025:

The cash flow statement shows a healthy core business. Operating Cash Flow (OCF) of $45.2 million for the TTM period ending mid-2025 is substantial, indicating the company's main business is a strong cash generator. The Investing Cash Flow (ICF) is a relatively small outflow of $5.86 million, suggesting disciplined capital expenditure. The significant negative Financing Cash Flow of -$33.62 million is a positive sign for investors, as it primarily reflects the company returning capital to shareholders, including through dividends, which were recently $0.45 per share quarterly.

Liquidity Strengths and Actions

The overall liquidity position for Karat Packaging Inc. is a clear strength. The combination of a current ratio well over 2.0 and a quick ratio above 1.0 means they have ample short-term resources. Plus, as of June 30, 2025, they had $44.7 million in financial liquidity, plus another $26.4 million in short-term investments. That's a total of over $71 million in near-cash assets. They're not scrambling for cash. Still, the high dividend payout ratio (around 120.00% of earnings, based on recent data) warrants a closer look at its sustainability against that strong OCF, but the cash position is currently robust.

Valuation Analysis

You are looking at Karat Packaging Inc. (KRT) and wondering if the market has it right, especially with the stock price volatility we've seen this year. The short answer is that the stock appears to be trading at a slight discount based on its earnings multiple, but the high dividend payout raises a significant red flag. We need to map the near-term risk against the apparent value.

The core valuation metrics suggest Karat Packaging Inc. is not grossly overvalued, especially when you look at its Price-to-Earnings (P/E) ratio. As of November 2025, the trailing P/E ratio sits at approximately 14.08. This is a reasonable multiple for a company in the consumer cyclical sector, and the forward P/E is even lower at 13.63, suggesting analysts expect a slight bump in future earnings. The stock is cheap on earnings, but you have to check the balance sheet.

Here is a quick look at the key valuation multiples based on the latest available data:

The Enterprise Value-to-EBITDA (EV/EBITDA) ratio is also favorable at 9.34, which is a good sign for total company value relative to its operating cash flow before non-cash items. But still, the Price-to-Book (P/B) of 2.75 is not exactly a deep value signal. The market is pricing in some growth, just not what it was earlier this year.

Stock Trend and Dividend Reality Check

The stock price trend over the last 12 months tells a story of significant decline and current consolidation. The 52-week trading range for Karat Packaging Inc. has been wide, from a low of $20.61 to a high of $33.89. The stock has seen a sharp drop, decreasing by about 28.38% in 2025 alone. This downward pressure has pushed the dividend yield to an eye-popping level.

Karat Packaging Inc. currently offers an annualized dividend of $1.80 per share, translating to a substantial dividend yield of about 8.5%. That yield is definitely attractive, but here's the quick math: the dividend payout ratio is a staggering 120.00%. What this estimate hides is that the company is paying out more in dividends than it is earning in net income. That's not a sustainable model, and it's why the market is skeptical.

• Stock price dropped 28.38% in 2025.
• Current dividend yield is a high 8.5%.
• Payout ratio of 120.00% signals risk of a future dividend cut.

The analyst community has picked up on this risk, too. The consensus rating from the six brokerages covering Karat Packaging Inc. is 'Reduce.' Specifically, two analysts recommend 'Sell,' three suggest 'Hold,' and only one gives a 'Buy.' The average one-year price target is $29.67, which implies a significant upside from the current price around $21.12, but the 'Reduce' consensus suggests caution is warranted. You can get a deeper dive into who is buying and selling in Exploring Karat Packaging Inc. (KRT) Investor Profile: Who's Buying and Why?

So, the stock is technically 'undervalued' by a simple P/E comparison and has a high target price, but the analyst consensus and the unsustainable dividend payout ratio suggest the market is pricing in a necessary correction to the dividend policy or a continued earnings squeeze. Your action here should be to scrutinize the cash flow statement to see if the dividend is at least covered by free cash flow, which is a better measure of sustainability than net income.

Risk Factors

You're looking at Karat Packaging Inc. (KRT) and seeing solid growth, but my job is to map the potholes in the road. The biggest near-term risk for KRT isn't demand-it's the relentless pressure on margins from geopolitical trade policy and a fiercely competitive market. Simply put, tariffs are eating into their profits, and they have to fight hard to pass those costs along.

External & Regulatory Risks: The Tariff Headwind

The most immediate and material risk is the volatility in global trade, specifically US tariffs on Chinese goods. Karat Packaging Inc. (KRT) is a distributor and manufacturer, so its cost of goods sold (COGS) is highly sensitive to import duties. This isn't a theoretical risk; it's a realized financial hit.

In the third quarter of 2025 alone, increased import costs, primarily from higher duties and tariffs, rose by an estimated $8.2 million compared to the prior-year quarter. This is a huge headwind. The company's mitigation strategy is defintely working, though, as they aggressively reduced their sourcing from China to just 15% in March 2025, with a target to drop below 10% by the end of Q2 2025. That's a clear, decisive action.

• Tariff Impact: Import costs up $8.2 million in Q3 2025.
• Mitigation: China sourcing reduced from 20% to 15% by March 2025.
• Diversification: Expanding sourcing to Malaysia, Indonesia, Vietnam, and Thailand.

Operational Risks: Competition and Supply Chain Resilience

The foodservice packaging industry is fragmented and highly competitive. While Karat Packaging Inc. (KRT) has a strong position, especially with its push into eco-friendly products, sustaining price increases is tough when rivals are constantly undercutting. If they can't maintain their pricing power, the tariff costs land squarely on their bottom line.

To be fair, the company is tackling supply chain risk head-on by increasing domestic sourcing from 15% to 20% of total supply in Q3 2025. This move helps them bypass import volatility and freight cost spikes. Plus, their new paper bag business, secured with a major national chain, is a smart strategic move, expected to add roughly $20 million in annual revenue once fully ramped. That's a good way to diversify product risk.

Financial Risks: Margin Compression and Capital Structure

The ultimate risk is margin compression, where costs rise faster than sales prices. You see this clearly in the Q3 2025 results. Despite record net sales of $124.5 million, the gross margin dropped to 34.5%, down significantly from 38.6% in the same quarter last year. This pressure translated directly to the bottom line: net income for Q3 2025 was $7.6 million, a noticeable decrease from $9.3 million in the prior-year quarter.

Here's the quick math: Sales grew 10.4%, but the cost of goods sold grew 17.8%, largely due to those import costs. Also, keep an eye on capital structure moves. The secondary offering of 1.5 million shares at $27.00 per share in June 2025, while raising capital, temporarily dipped the share price by 7.4% and represents dilution risk for existing shareholders. You need to weigh that against their comfortable debt-to-equity ratio of 0.3x.

For a deeper dive into the company's performance, you should check out the full analysis: Breaking Down Karat Packaging Inc. (KRT) Financial Health: Key Insights for Investors.

Your next step: Track Q4 2025 gross margin guidance, which management expects to be between 33% and 35%, to see if the margin compression stabilizes.

Growth Opportunities

You're looking at Karat Packaging Inc. (KRT) and wondering if the growth story is real, especially with all the noise around tariffs and supply chain headaches. Honestly, the company's near-term future is defintely anchored in three clear, actionable strategies: product innovation, market penetration, and a smart pivot on global sourcing.

The core of their growth isn't a vague promise; it's a tangible shift toward the Exploring Karat Packaging Inc. (KRT) Investor Profile: Who's Buying and Why? eco-friendly packaging market, which is being forced open by government regulation. Karat Packaging Inc. is leaning hard into its Karat Earth® line, which already accounted for 33.6% of total sales in 2024. Plus, they secured a major two-year contract with a national chain to supply paper bags, a new product category that management expects could contribute up to $100 million in annual sales within a few years. That's a massive, clear revenue stream.

Here's the quick math on their recent performance, which shows the strategy is working: Net sales for the 2025 third quarter hit $124.5 million, a solid 10.4% increase year-over-year. For the full 2025 fiscal year, the analyst consensus revenue estimate sits at $465.69 million. The company itself expects Q4 2025 net sales to grow by another 10% to 14% over the prior year quarter.

Their market expansion is also driving the top line. They are seeing double-digit sales growth in key regions like Texas and California. The online sales channel is a quiet powerhouse, showing a nearly 20% sales increase in Q1 2025 alone. This focus on high-growth channels and geographies is a great sign of disciplined execution.

• Sourcing diversification is key.
• New paper bag line is a major catalyst.
• Online sales are growing fast.

A crucial competitive advantage is their supply chain agility, or what we call 'sourcing diversification.' To combat rising tariffs and import costs, Karat Packaging Inc. has been aggressively reducing its reliance on China. Sourcing from China dropped from 20% at the end of 2024 to just 15% by March 2025, with a target of under 10% in Q2. They are also ramping up domestic production, increasing domestic sourcing from 15% to 20% of total supply to mitigate tariff exposure and enhance supply chain resilience.

What this estimate hides, though, is the pressure on margins. Despite the growth, the gross margin for Q3 2025 was 34.5%, down from 38.6% a year earlier, driven by higher import duties and tariffs. Karat Packaging Inc. is offsetting this with disciplined pricing initiatives and operational efficiencies, but it's a constant battle. The consensus EPS estimate for the full 2025 fiscal year is $1.55, and analysts project a future earnings growth of 8.43% for 2026.

Here is a snapshot of the 2025 financial performance and outlook:

The company is also showing investor-friendly capital allocation, initiating its first-ever share repurchase program of up to $15.0 million in November 2025. This signals management's confidence in the stock being undervalued and their future cash flow generation.

Finance: Monitor gross margin closely and track the revenue contribution from the new paper bag line in the Q4 2025 report.