GWA Group Limited’s (ASX:GWA) stable earnings sentiment drives analysts to expect positive growth of 1.44% annualised over the couple of years ahead, but let’s stop and think through this appraisal. Investors should consider the forces that are pushing this decrease, as there are certain implications that can impact on shareholder return. To get a preliminary understanding, I will shine a light on the behaviour of GWA Group’s margins so investors can evaluate the revenue and cost drivers behind future earnings projections and understand how they may impact on returns compared to the industry.See our latest analysis for GWA Group
What does GWA’s profit margin tell us?
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. By calculating GWA’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 GWA
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = AU$55.40m ÷ AU$450.00m = 12.31%
There has been an expansion in GWA Group’s margin over the past five years, with 4.38% in average net income growth and decline in revenue growth of -6.95% on average, indicating that that despite the previous revenue decline, the company has managed to maintain positive earnigns growth and therefore increase the proportion of revenue that falls to the bottom line. The current 12.31% margin seems to continue this movement, indicating that earnings growth has likely been driven through improved cost management as opposed to revenue growth.
What can we tell from future expectations?
It is expected that margins will further the previous expansion, with annual earnings growth tipped at -7.72% and revenue expected to fall at 1.44% on an annual basis. This suggests future earnings growth is driven further by an expected reduction in costs as opposed to revenue growth, which is enlarging the incremental amount of net income that is retained from falling revenue. However, those interested in the company should remember that margin expansion can hold various implications on the company’s performance depending on how it operates, which makes further research very important. Profit margins are commonly useful when employed as a comparitive measure to judge a business’ profit-making ability against its industry. For GWA, it is expected that profit margins will expand along with the Building industry margins, and at the same time, the forecasted ROE of GWA Group is greater than the industry at 15.99% and 13.49% respectively, although it must not be forgotten than this result is influenced by the company’s debt levels. This suggests that analysts expect GWA Group’s return per dollar of equity will exceed the industry due to the earnings attributes identified in our margin analysis. But before moving forward, it must be remembered that bottom line earnings and profit margins are susceptible to being manipulated and don’t always give the full picture. Thus, it is essential to run your own analysis on GWA Group’s future expectations whilst maintaining a watchful eye over the long term sustainability of cost cutting measures as a way to drive earnings growth.
For GWA, I’ve put together three important factors you should further examine:
- 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.
- Valuation: What is GWA 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 GWA is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of GWA? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!