Collection House Limited (ASX:CLH): What Is Driving Margins?

Collection House Limited’s (ASX:CLH) steady outlook for net income has analysts forecasting slight growth of 3.59% annualised over the couple of years ahead, but it’s critical to take a step back and consider this projection. Investors should consider the forces that are spurring this growth, because the sustainability of returns to shareholders can be impacted on in different ways. To get some insight, this article will interpret Collection House’s margin performance to help recognise the underlying make-up of revenue and expenses that is responsible for driving future earnings expectations and what it means for CLH’s returns relative to its competitors.

Check out our latest analysis for Collection House

Breaking Down CLH’s Profit Margin

At a high level, a company’s ability to earn on their sales efforts can play an important role in determining shareholder value. CLH’s profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.

Margin Calculation for CLH

Profit Margin = Net Income ÷ Revenue

∴ Profit Margin = AU$17.43m ÷ AU$130.81m = 13.32%

There has been a contraction in Collection House’s margin over the past five years, due to average revenue growth of 8.59% outstripping average net income growth of 6.72%, 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 13.32% margin seems to continue this movement, indicating that earnings growth has likely been driven through an increase in revenue rather than improved cost management.

ASX:CLH Future Profit July 12th 18
ASX:CLH Future Profit July 12th 18

What does Collection House’s margin expectation tell us about future earnings?

It is expected that margins will contract further, with annual revenue growth tipped at 4.78% and a forecasted 3.59% in annual net income growth. This suggests future earnings growth is driven further by an increase in top line revenue, which is expected to squeeze the incremental amount of net income that is retained. Despite this, those interested in the company should remember that margin contraction can hold various implications on the company’s performance depending on how it operates, which makes further research very important.

ASX:CLH Future Profit July 12th 18
ASX:CLH Future Profit July 12th 18
Generally, it is useful to judge profit margin and its implication on return in comparison to other companies who share similar traits. In Collection House’s case, profit margins moving forward are forecasted to contract as the margins expand in the Commercial Services industry, and at the same time, CLH’s forecasted ROE of 11.72% exceeds that of the expected 9.98% ROE of the industry (note that this observation is also influenced by relative debt levels). This serves as an indication of the confidence amongst analysts covering that stock that the nature of Collection House’s earnings will result in a higher return per dollar of equity compared to the industry. 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 Collection House’s future expectations whilst maintaining a watchful eye over the likelihood and sustainability of the top line performance that is expected to drive earnings growth.

Next Steps:

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