What Do Expectations Tell Us About Rain Industries Limited's (BOM:500339) Margins In The Years Ahead?

As analysts project Rain Industries Limited (BOM:500339) to register solid earnings growth of 20.79% annualised over the next few years, it's important to take a step back and consider this positive outlook. It is crucial for investors to do this, so they can judge the underlying components responsible for causing this projected increase, as there are certain implications that can impact on shareholder return. To help investors get a top level understanding, I will try to evaluate Rain Industries's margin behaviour to help recognise the underlying make-up of revenue and expenses that is responsible for driving future earnings expectations and what it means for 500339's returns relative to its competitors.

A closer look at 500339's profit margin

In general, the value that accrues to equity holders is partly reliant on the ability of a company to convert sales revenue in to earnings. Knowing the portion of top line revenue that is turned into net income helps to assess this ability whilst spotting profit drivers, and can be found by calculating 500339's profit margin.

Rain Industries's margin has contracted in the past five years, due to a positive 9.34% average growth in revenue and decline in net income of -4.53% on average, indicating that that a smaller percentage of revenue is being converted in to net income despite the top line growth. 500339's most recent margin of 7.87% appears to follow this trend, indicating the earnings decline has been driven through an increase in costs as opposed to a reduction in revenue.

How is Rain Industries’s margin expected to behave in the future and what could it mean for shareholders?

Forward looking projections suggest margins will reverse its previous trend and start to expand, with an expectation of 13.77% in annual revenue growth and a forecasted 20.79% in annual net income growth. This suggests the previous earnings decline is expected to reverse due to enhanced cost efficiency alongside revenue increases. But as a result of improved cost efficiency, net income growth is expected to exceed revenue growth, which is causing the expectation for margins to expand. Nonetheless, those watching the stock must know a expanding margin has different impacts on profit and return depending on the underlying situation, which reinforces the importance of deeper research.

Next Steps:

For 500339, I've put together three fundamental factors 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 500339 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 500339 is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of 500339? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.