Rémy Cointreau SA (EPA:RCO): What Is Driving Earnings Margins?

By
Simply Wall St
Published
March 27, 2018
ENXTPA:RCO

With analysts projecting Rémy Cointreau SA (ENXTPA:RCO) to register solid earnings growth of 17.03% in the coming 12 months, it's necessary to take a moment and consider this encouraging sentiment. Investors should consider the forces that are spurring this growth, because the sustainability of returns to shareholders can be impacted on in different ways. To help investors get a top level understanding, I will try to evaluate Rémy Cointreau's margin behaviour to help recognise the underlying make-up of revenue and expenses that is responsible for driving future earnings expectations and what it means for RCO's returns relative to its competitors.

Check out our latest analysis for Rémy Cointreau

A closer look at RCO'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. By calculating RCO's profit margin, we can take a closer look at this ability and use it to understand what is driving earnings growth.

Margin Calculation for RCO

Profit Margin = Net Income ÷ Revenue

∴ Profit Margin = 138.50 Million ÷ 1.13 Billion = 12.30%

Rémy Cointreau's margin has contracted in the past five years, as a result of 0.73% in average revenue growth outstripping 0.10% in average net income growth, indicating that that a smaller percentage of revenue is being converted in to net income despite the top line growth. The current 12.30% margin seems to continue this movement, which could imply that increasing revenue has driven earnings growth rather than enhanced cost management.

How is Rémy Cointreau’s margin expected to behave in the future and what could it mean for shareholders?

Forward looking projections suggest margins will transition into expansion, with 6.04% in expected annual revenue growth and 10.20% earnings growth expected annually. This suggests the previous earnings stability is expected to transition in to stronger growth through 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. Nonetheless, those interested in the company should remember that margin expansion can hold various implications on the company's performance depending on how it operates, which makes further research very important.

ENXTPA:RCO Future Profit Mar 27th 18
ENXTPA:RCO Future Profit Mar 27th 18
Generally, it is useful to judge profit margin and its implication on return in comparison to other companies who share similar traits. For RCO, it is expected that profit margins will expand whilst the Beverage industry margins remain constant, and at the same time, the forecasted ROE of Rémy Cointreau is greater than the industry at 11.65% and 9.58% respectively, although it must not be forgotten than this result is influenced by the company's debt levels. This highlights that analysts are confident that the underlying earnings characteristics mentioned above will provide a higher return for shareholders in relation 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 Rémy Cointreau'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 RCO, I've put together three important 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 RCO 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 RCO is currently mispriced by the market.
  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of RCO? 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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