What Do Expectations Tell Us About Scandinavian Tobacco Group A/S's (CPH:STG) Margins In The Future?

Scandinavian Tobacco Group's stable earnings sentiment drives analysts to expect slight growth of 0.79% in the coming year, but it's necessary to take a moment and think through this appraisal. Those invested in the stock should contemplate the factors that are causing this growth, because the sustainability of returns to shareholders can be impacted on in different ways. To help investors get a top level understanding, this article will interpret Scandinavian Tobacco Group'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 STG's returns relative to its competitors.

View our latest analysis for Scandinavian Tobacco Group

Understanding STG's earnings with 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 STG's profit margin.

Scandinavian Tobacco Group's margin has contracted in the past five years, with 3.11% in average revenue growth exceeding a 2.01% 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. STG's most recent margin of 11.01% appears to follow this trend, which could imply that increasing revenue has driven earnings growth rather than enhanced cost management.

Using Scandinavian Tobacco Group's margin expectations as a way to understand projections for the future

Based on future expectations, STG's profit margin will reverse its previous trend and start to expand, with an expectation of 0.64% in annual revenue growth and 4.49% 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. Nonetheless, those interested in the company should remember that margin expansion has different impacts on profit and return depending on the underlying situation, which reinforces the importance of deeper research.

Profit margins are commonly useful when employed as a comparitive measure to judge a business' profit-making ability against its industry. For Scandinavian Tobacco Group in particular, it is expected that profit margins will expand whilst the margins contract in the Tobacco industry, and at the same time, the industry’s forecasted ROE of 20.58% exceeds that of the expected 9.10% ROE for STG. This serves as an indication that analysts covering the stock expect the nature of Scandinavian Tobacco Group's earnings will produce a lower return per dollar of equity compared to the industry. But before moving forward, it must be remembered that bottom line earnings and profit margins are susceptible to being manipulated and don't always give the full picture. Thus, it is essential to run your own analysis on Scandinavian Tobacco Group'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 STG, I've put together three fundamental 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. Valuation: What is STG 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 STG is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of STG? 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.