G4S plc (LON:GFS): What Is Driving Margins?

As analysts project G4S plc (LSE:GFS) to register solid earnings growth of 16.98% in the coming 12 months, let's stop and think through this positive outlook. It is crucial for investors to do this, so they can judge the underlying components responsible for spurring this growth, because the sustainability of returns to shareholders can be impacted on in different ways. To get a preliminary understanding, this article will interpret G4S's margin performance to assist in analysing the revenue and cost anatomy behind the earnings expectations for the future and the impact it has on shareholder returns relative to the wider industry.

View our latest analysis for G4S

A closer look at GFS'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. GFS's profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.

The past five years have seen G4S's margin expand, due to average net income growth of 11.14% outstripping average revenue growth of 1.23%, indicating that that the previous revenue growth has been acompanied by a growing portion translated in to earnings. The current 3.09% margin seems to continue this movement, which could imply improved cost efficiency as well as increasing revenue contributed to the previous earnings growth.

Understanding what could be driving G4S's future earnings

Forward looking projections suggest margins will expand further, with 2.73% in expected annual revenue growth and annual net income growth forecasted at 14.04%. 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. However, those interested in the company should remember that a expanding margin can mean different things for different companies, thus more detailed research is essential.

Generally, it is useful to judge profit margin and its implication on return in comparison to other companies who share similar traits. For GFS, it is expected that profit margins will expand simultaneously with margins in the Commercial Services industry, whilst at the same time, GFS’s forecasted ROE of 27.20% exceeds that of the expected 10.58% ROE of the industry (note that this observation is also influenced by relative debt levels). This suggests that analysts expect G4S's return per dollar of equity will exceed the industry due to the earnings attributes identified in our margin analysis. 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 G4S'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 GFS, I've compiled three key aspects you should look at:

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 GFS 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 GFS is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of GFS? 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.