Dignity plc (LON:DTY): Are Forecast Margins sustainable?

Simply Wall St
March 07, 2018
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As analysts expect Dignity plc (LSE:DTY) to report a fall in earnings of -12.57% in the coming 12 months, let's stop and think through this unfavourable outlook. Those invested in the stock should contemplate the factors that are sparking this decline, because the sustainability of returns to shareholders can be impacted on in different ways. To help investors get a top level understanding, I will shine a light on the behaviour of Dignity’s margins to help recognise the underlying make-up of revenue and expenses that is responsible for driving future earnings expectations and what it means for DTY's returns relative to its competitors.

View our latest analysis for Dignity

What does DTY's profit margin tell us?

Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. By calculating DTY'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 DTY

Profit Margin = Net Income ÷ Revenue

∴ Profit Margin = 60.70 Million ÷ 325.40 Million = 18.65%

Dignity's margin has contracted in the past five years, as a result of average revenue growth of 7.99% surpassing 3.22% in average net income growth, which suggests that a smaller percentage of revenue falls to the bottom line despite the fact revenue has increased over the previous 5 years. DTY's most recent margin of 18.65% appears to follow this trend, which suggests that the increase in net income has possibly occured due to growing revenues as opposed to lowering costs.

What does Dignity's margin expectation tell us about future earnings?

Forward looking projections suggest margins will contract further, with annual revenue growth tipped at 1.58% and earnings expected to fall at -13.21% on an annual basis. This suggests the previous earnings growth is expected to reverse due to an increase in costs rather than a dramatic fall in revenue potential. This is causing negative net income growth, whilst revenue growth remains positive, resulting in the expectation for margins to contract. However, those interested in the company should remember that a contracting margin has different impacts on profit and return depending on the underlying situation, which reinforces the importance of deeper research.

LSE:DTY Future Profit Mar 7th 18
LSE:DTY Future Profit Mar 7th 18
Profit margins are commonly useful when employed as a comparitive measure to judge a business' profit-making ability against its industry. For DTY, it is expected that profit margins will contract at the same time as the Consumer Services industry margins expand, and at the same time, the forecasted ROE of Dignity is greater than the industry at 91.70% and 10.87% respectively, although it must not be forgotten than this result is influenced by the company's debt levels. This serves as an indication of the confidence amongst analysts covering that stock that the nature of Dignity's earnings will result in a higher return per dollar of equity compared 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 Dignity's future expectations whilst maintaining a watchful eye over cost behaviour, because if the business is able to maintain their revenue trajectory, there may be an opportunity to return to positive earnings growth and attractive returns.

Next Steps:

For DTY, I've compiled three pertinent aspects you should further research:

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

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