As analysts expect 7C Solarparken AG (DB:HRPK) to register a contraction in earnings of -19.66% in the coming year, it’s necessary to take a moment and consider this unfavourable outlook. It is crucial for investors to do this, so they can judge the underlying components responsible for causing this decline, as there are certain implications that can impact on shareholder return. To get some insight, this article will interpret 7C Solarparken’s margin performance to help recognise the underlying make-up of revenue and expenses that is responsible for driving future earnings expectations and what it means for HRPK’s returns relative to its competitors.Check out our latest analysis for 7C Solarparken
What can we tell from HRPK’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 HRPK’s profit margin.
Margin Calculation for HRPK
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 7.75 Million ÷ 33.19 Million = 23.33%
The past five years have seen 7C Solarparken’s margin contract, as a result of 28.05% in average revenue growth exceeding average net income growth of 23.72%, which means that although revenue has increased, a smaller portion falls in to the bottom line. HRPK’s most recent margin of 23.33% appears to follow this trend, which could imply that increasing revenue has driven earnings growth rather than enhanced cost management.
What can we tell from future expectations?
Based on future expectations, HRPK’s profit margin will contract further, with annual revenue growth tipped at 0.67% and net income forecasted to decline annually at -0.70%. This suggests the previous earnings growth is expected to reverse due to an increase in costs rather than a dramatic fall in revenue potential. This is causing negative net income growth, whilst revenue growth remains positive, resulting in the expectation for margins to contract. However, those interested in the company should remember that margin contraction has different impacts on profit and return depending on the underlying situation, which reinforces the importance of deeper research. In many situations, looking at a company’s profit margin in relation to other similar businesses can be more informative. In 7C Solarparken’s case, future profit margin is expected to contract as the margins in the Renewable Energy industry expand, and at the same time, 7C Solarparken’s projected ROE of 6.75% is relatively similar to the industry’s 7.71% expectation, but debt levels need to be considered before accpeting this observation. This suggests that analysts expect 7C Solarparken’s return per dollar of equity will approximately match the industry as a result of the earnings attributes identified by our margin analysis. 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 7C Solarparken’s future expectations whilst maintaining a watchful eye over cost behaviour, because if the business is able to maintain their revenue trajectory, there may be an opportunity to return to positive earnings growth and attractive returns.
For HRPK, I’ve put together three pertinent 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 HRPK 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 HRPK is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of HRPK? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!