What Do Expectations Tell Us About EASY SOFTWARE AG's (ETR:ESY) Margins In The Future?

As analysts expect EASY SOFTWARE AG (ETR:ESY) to produce solid earnings growth of 25.60% annualised over the few years to come, it's necessary to take a moment and think through this positive outlook. It is crucial for investors to do this, so they can judge the underlying components responsible for spurring this projected increase, as the return realised by shareholders may look different in the future if underlying assumptions are not realised. To get a preliminary understanding, this article will interpret EASY SOFTWARE'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.

View our latest analysis for EASY SOFTWARE

What can we tell from ESY's profit margin?

Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. ESY's profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.

There has been a contraction in EASY SOFTWARE's margin over the past five years, as a result of postive average revenue growth of 8.40% and decline in net income of -7.12% on average, 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 4.43% margin seems to continue this movement, which implies that an increase in costs has driven down earnings whilst revenue has managed to grow.

What can we tell from future expectations?

It is expected that margins will shift towards expansion, with annual revenue growth tipped at 5.25% and 25.60% earnings growth expected annually. This suggests the previous earnings decline is expected to reverse due to enhanced cost efficiency alongside revenue increases. But as a result of improved cost efficiency, net income growth is expected to exceed revenue growth, which is causing the expectation for margins to expand. Despite this, investors should realise margin expansion can hold various implications on the company's performance depending on how it operates, which makes further research very important. Generally, it is useful to judge profit margin and its implication on return in comparison to other companies who share similar traits. For EASY SOFTWARE in particular, future profit margin is expected to expand along with the margins in the Software industry, and at the same time, ESY’s forecasted ROE and the expected ROE of the industry is roughly equal at 11.00% and 11.92% respectively (note that relative debt levels need to be considered in this observation). This serves as an indication that analysts covering the stock expect the nature of EASY SOFTWARE's earnings will result in a return per dollar of equity that is similar 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 EASY SOFTWARE'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 ESY, I've compiled three relevant 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. Future Earnings: How does ESY's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of ESY? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.