Alma Media Oyj (HEL:ALMA): What Is Driving Earnings Margins?

As analysts forecast Alma Media Oyj (HLSE:ALMA) to produce noticeable earnings growth of 19.94% in the coming year, let's stop and consider this positive outlook. Those invested in the stock should contemplate the factors that are 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 try to evaluate Alma Media Oyj's margin behaviour 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.

See our latest analysis for Alma Media Oyj

A closer look at ALMA's profit margin

Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. 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 ALMA's profit margin.

There has been a contraction in Alma Media Oyj's margin over the past five years, as a result of postive average revenue growth of 1.76% and decline in net income of -4.06% on average, which means that although revenue has increased, a smaller portion falls in to the bottom line. The current 8.77% margin seems to continue this movement, which implies that an increase in costs has driven down earnings whilst revenue has managed to grow.

Understanding what could be driving Alma Media Oyj's future earnings

It is expected that margins will reverse its previous trend and start to expand, with an expectation of 2.34% in annual revenue growth and annual net income growth forecasted at 9.39%. 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. However, investors should realise margin expansion can mean different things for different companies, thus more detailed research is essential.

Profit margins are commonly useful when employed as a comparitive measure to judge a business' profit-making ability against its industry. For ALMA, it is expected that profit margins will expand along with the margins in the Media industry, whilst at the same time, ALMA’s forecasted ROE of 25.54% exceeds that of the expected 12.74% ROE of the industry (note that this observation is also influenced by relative debt levels). This suggests that analysts expect Alma Media Oyj's return per dollar of equity will exceed the industry due to the earnings attributes identified in 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 Alma Media Oyj'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 ALMA, there are three pertinent aspects 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 ALMA 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 ALMA is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of ALMA? 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.