As analysts expect Gateway Lifestyle Group (ASX:GTY) to register a decline in earnings of -13.78% in the coming year, let’s stop and think through this damaging sentiment. Investors should consider the forces that are pushing this decrease, because the sustainability of returns to shareholders can be impacted on in different ways. To get a preliminary understanding, I will try to evaluate Gateway Lifestyle Group’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 GTY’s returns relative to its competitors.Check out our latest analysis for Gateway Lifestyle Group
What can we tell from GTY’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 GTY’s profit margin.
Margin Calculation for GTY
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = AU$60.27m ÷ AU$154.68m = 38.97%
Gateway Lifestyle Group’s margin has expanded in the past five years, due to average net income growth of 78.86% outstripping 56.06% in average revenue growth, indicating that that the previous revenue growth has been accompanied by a growing portion translated in to earnings. The current 38.97% margin seems to continue this movement, indicating that earnings growth has likely been driven through improved cost management alongside the benefits of revenue growth.
What can we tell from future expectations?
Forward looking projections suggest margins will continue to expand, with 1.90% in expected annual revenue growth and 7.10% 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. Despite this, those watching the stock must know a expanding margin can mean different things for different companies, thus more detailed research is essential.
For GTY, there are three important aspects 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 GTY 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 GTY is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of GTY? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!