With analysts forecasting Coats Group plc (LSE:COA) to register a decline in earnings of -11.93% in the coming year, let's stop and evaluate this pessimistic vision. Those invested in the stock should contemplate the factors that are sparking this decrease, as the return realised by shareholders may look different in the future if underlying assumptions are not realised. To help investors get a top level understanding, I will try to evaluate Coats Group'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 Coats Group
Understanding COA'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. COA's profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.
Margin Calculation for COA
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 80.80 Million ÷ 1.51 Billion = 5.35%
Coats Group's margin has expanded in the past five years, as a result of positive average net income growth of 44.53% and decline in revenue growth of -2.44% on average, which suggests that the company has been able to convert a larger percentage of revenue into net income despite the top line has fallen over the previous 5 years. The current 5.35% margin seems to continue this movement, indicating that earnings growth has likely been driven through improved cost management as opposed to revenue growth.
Understanding what could be driving Coats Group's future earnings
Forward looking projections suggest margins will further the previous expansion, with annual revenue growth tipped at 4.59% and 11.16% 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. However, those watching the stock must know a expanding margin has different impacts on profit and return depending on the underlying situation, which reinforces the importance of deeper research. In many situations, looking at a company's profit margin in relation to other similar businesses can be more informative. In Coats Group’s case, it is expected that profit margins will expand along with the Luxury industry margins, and at the same time, the forecasted ROE of Coats Group is greater than the industry at 27.32% and 21.39% 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 Coats Group's future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For COA, there are three important aspects you should further research:
- 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.
- Valuation: What is COA 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 COA is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of COA? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
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.