Smartgroup Corporation Ltd (ASX:SIQ): What Is Driving Earnings Margins?

With analysts forecasting Smartgroup Corporation Ltd (ASX:SIQ) to report robust earnings growth of 20.35% annualised over the couple of years ahead, let’s stop and consider this strong vision. Investors should consider the forces that are causing this growth, because the sustainability of returns to shareholders can be impacted on in different ways. To get a preliminary understanding, this article will interpret Smartgroup’s margin performance 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 Smartgroup

Breaking Down SIQ’s Profit Margin

Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. By calculating SIQ’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 SIQ

Profit Margin = Net Income ÷ Revenue

∴ Profit Margin = AU$41.31m ÷ AU$205.44m = 20.11%

The past five years have seen Smartgroup’s margin expand, with average net income growth of 42.56% outstripping 25.51% in average revenue growth, indicating that that the previous revenue growth has been accompanied by a growing portion translated in to earnings. SIQ’s most recent margin of 20.11% appears to follow this trend, which could imply improved cost efficiency as well as increasing revenue contributed to the previous earnings growth.

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

What can we tell from future expectations?

It is expected that margins will further the previous expansion, with annual revenue growth tipped at 8.94% and 20.35% earnings growth expected annually. 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. However, those interested in the company should remember that a expanding margin can mean different things for different companies, thus more detailed research is essential.

ASX:SIQ Future Profit July 12th 18
ASX:SIQ Future Profit July 12th 18
In many situations, looking at a company’s profit margin in relation to other similar businesses can be more informative. For SIQ, future profit margin is expected to expand along with the Commercial Services industry margins, and at the same time, SIQ’s forecasted ROE of 32.32% 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 Smartgroup’s earnings will result in a higher return per dollar of equity compared to the industry. 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 Smartgroup’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.

Next Steps:

For SIQ, I’ve put together three important factors you should further examine:

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