Rovio Entertainment Oyj (HEL:ROVIO): What Is Driving Earnings Margins?

As analysts expect Rovio Entertainment Oyj (HLSE:ROVIO) to record a contraction in earnings of -9.15% over the next year, it's necessary to take a moment and think through this damaging sentiment. Those invested in the stock should contemplate the factors that are sparking this decrease, as there are certain implications that can impact on shareholder return. To get a preliminary understanding, this article will interpret Rovio Entertainment Oyj'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 ROVIO's returns relative to its competitors.

View our latest analysis for Rovio Entertainment Oyj

A closer look at ROVIO's profit margin

At a high level, a company’s ability to earn on their sales efforts can play an important role in determining shareholder value. ROVIO's profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.

Rovio Entertainment Oyj's margin has expanded in the past five years, with triple digit earnings growth exceeding average revenue growth of 35.18%, which suggests that the company has been able to convert a larger percentage of revenue into net income whilst grow their top line at the same time. The current 6.93% margin seems to continue this movement, which suggests that the increase in net income has likely occurred from a combination of enhanced cost efficiency as well as top line growth.

Using Rovio Entertainment Oyj's margin expectations as a way to understand projections for the future

Forward looking projections suggest margins will continue to expand, with an expectation of 0.82% in annual revenue growth and annual net income growth forecasted at 31.91%. 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 watching the stock must know margin expansion can hold various implications on the company's performance depending on how it operates, which makes further research very important.

In many situations, looking at a company's profit margin in relation to other similar businesses can be more informative. In Rovio Entertainment Oyj’s case, it is expected that profit margins will expand simultaneously with Software industry margins, whilst at the same time, the forecasted ROE of Rovio Entertainment Oyj is greater than the industry at 13.44% and 11.28% respectively, although it must not be forgotten than this result is influenced by the company's debt levels. This suggests that analysts expect Rovio Entertainment 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 Rovio Entertainment 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 ROVIO, there are three pertinent 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 ROVIO 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 ROVIO is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of ROVIO? 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.