ASML Holding’s steady outlook for net income drives analysts to project subtle growth of 8.47% in the coming 12 months, but it’s necessary to take a moment and reflect on this appraisal. Investors should consider the forces that are spurring this growth, as the return realised by shareholders may look different in the future if underlying assumptions are not realised. To get a preliminary understanding, I will try to evaluate ASML Holding’s margin behaviour to assist in analysing the revenue and cost anatomy behind the earnings expectations for the future and the impact it has on shareholder returns relative to the wider industry.
What does ASML’s profit margin tell us?
Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. By calculating ASML’s profit margin, we can take a closer look at this ability and use it to understand what is driving earnings growth.
Margin Calculation for ASML
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 2.04 Billion ÷ 8.40 Billion = 24.30%
ASML Holding’s margin has contracted in the past five years, with 6.19% in average revenue growth surpassing 4.76% in average net income growth, which means that although revenue has increased, a smaller portion falls in to the bottom line. ASML’s most recent margin of 24.30% appears to follow this trend, indicating that earnings growth has likely been driven through an increase in revenue rather than improved cost management.
Understanding what could be driving ASML Holding’s future earnings
Forward looking projections suggest margins will transition into expansion, with an expectation of 11.62% in annual revenue growth and a forecasted 20.46% in annual net income growth. This suggests future earnings growth is driven further by enhanced cost efficiency alongside revenue increases, which is enlarging the incremental amount of net income that is retained from the forecasted revenue growth. Nonetheless, those watching the stock must know margin expansion can hold various implications on the company’s performance depending on how it operates, which makes further research very important. Generally, it is useful to judge profit margin and its implication on return in comparison to other companies who share similar traits. In ASML Holding’s case, future profit margin is expected to expand along with the Semiconductor industry margins, and at the same time, the forecasted ROE of ASML Holding is greater than the industry at 20.79% and 8.36% respectively, although it must not be forgotten than this result is influenced by the company’s debt levels. This suggests that analysts expect ASML Holding’s return per dollar of equity will exceed the industry due to the earnings attributes identified in our margin analysis. However, margins use items on the income statement that are prone to being manipulated by various accounting measures, which can distort our analysis. Thus, it is essential to run your own analysis on ASML Holding’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For ASML, I’ve put together three important aspects you should further research:
1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Valuation: What is ASML worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ASML is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of ASML? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!