NorCom Information Technology AG (ETR:NC5A): Are Forecast Margins sustainable?

As analysts forecast NorCom Information Technology AG (XTRA:NC5A) to register solid earnings growth of 18.03% over the next year, it's important to take a step back and evaluate this encouraging sentiment. It is crucial for investors to do this, so they can judge the underlying components responsible for driving this projected increase, because the sustainability of returns to shareholders can be impacted on in different ways. To get a preliminary understanding, I will try to evaluate NorCom Information Technology's margin behaviour to assist in analysing the revenue and cost anatomy behind the earnings expectations for the future and the impact it has on shareholder returns relative to the wider industry.

Check out our latest analysis for NorCom Information Technology

What does NC5A's profit margin tell us?

Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. By calculating NC5A's profit margin, we can take a closer look at this ability and use it to understand what is driving earnings growth.

The past five years have seen NorCom Information Technology's margin expand, due to 34.40% in average net income growth and decline in revenue growth of -11.34% on average, which suggests that the company has been able to convert a larger percentage of revenue into net income despite the top line has fallen over the previous 5 years. NC5A's most recent margin of 11.30% appears to follow this trend, which suggests that the increase in net income has probably occured due to enhanced cost efficiency as opposed to revenue increases.

Understanding what could be driving NorCom Information Technology's future earnings

Margins are expected to keep on expanding, with annual revenue growth tipped at 18.73% and 37.59% 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 hold various implications on the company's performance depending on how it operates, which makes further research very important.

Profit margins are commonly useful when employed as a comparitive measure to judge a business' profit-making ability against its industry. For NorCom Information Technology in particular, it is expected that profit margins will expand simultaneously with margins in the IT industry, whilst at the same time, NC5A’s forecasted ROE of 35.09% exceeds that of the expected 14.85% ROE of the industry. This serves as an indication of the confidence amongst analysts covering that stock that the nature of NorCom Information Technology'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 NorCom Information Technology'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 NC5A, I've compiled three key 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 NC5A 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 NC5A is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of NC5A? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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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.