Silver Chef Limited (ASX:SIV): Are Forecast Margins sustainable?

Silver Chef Limited’s (ASX:SIV) negative outlook for net income has analysts projecting a meaningful decline of -25.97% in the coming year, but it’s critical to take a step back and think through this expectation. It is crucial for investors to do this, so they can judge the underlying components responsible for pushing this decline, because the sustainability of returns to shareholders can be impacted on in different ways. To help investors get a top level understanding, I will try to evaluate Silver Chef’s margin behaviour 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.

Check out our latest analysis for Silver Chef

What can we tell from SIV’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 SIV’s profit margin.

Margin Calculation for SIV

Profit Margin = Net Income ÷ Revenue

∴ Profit Margin = AU$2.61m ÷ AU$294.23m = 0.89%

The past five years have seen Silver Chef’s margin contract, with 22.56% in average revenue growth exceeding average net income growth of 10.98%, which suggests that a smaller percentage of revenue falls to the bottom line despite the fact revenue has increased over the previous 5 years. The current 0.89% margin seems to continue this movement, indicating that earnings growth has likely been driven through an increase in revenue rather than improved cost management.

Understanding what could be driving Silver Chef’s future earnings

It is expected that margins will move from contraction into expansion, with -13.10% in expected annual earnings growth and revenue forecasted to decline annually at 97.57%. 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, investors should realise margin expansion has different impacts on profit and return depending on the underlying situation, which reinforces the importance of deeper research.

Next Steps:

For SIV, there are three relevant 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. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for SIV’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of SIV? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!