Superloop Limited’s (ASX:SLC) remarkably upbeat outlook for net income has analysts projecting substantial growth of 67.22% annualised over the next few years, but it’s necessary to take a moment and reflect on this expectation. It is crucial for investors to do this, so they can judge the underlying components responsible for causing this growth, as the return realised by shareholders may look different in the future if underlying assumptions are not realised. To get a preliminary understanding, I will shine a light on the behaviour of Superloop’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.View out our latest analysis for Superloop
Breaking Down SLC’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 SLC’s profit margin.
Margin Calculation for SLC
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = AU$2.52m ÷ AU$107.04m = 2.35%
There has been a contraction in Superloop’s margin over the past five years, as a result of triple digit revenue growth surpassing a 48.14% average growth in net income, indicating that that a smaller percentage of revenue is being converted in to net income despite the top line growth. SLC’s most recent margin of 2.35% appears to follow this trend, which could imply that increasing revenue has driven earnings growth rather than enhanced cost management.
Understanding what could be driving Superloop’s future earnings
Based on future expectations, SLC’s profit margin will shift towards expansion, with 14.15% in expected annual revenue growth and a forecasted 67.22% in annual net income growth. 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 watching the stock must know a expanding margin has different impacts on profit and return depending on the underlying situation, which reinforces the importance of deeper research.
For SLC, I’ve put together three key factors you should look at:
- 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 SLC 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 SLC is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of SLC? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!