As analysts forecast NMC Health Plc (LON:NMC) to register solid earnings growth of 22.01% annualised over the next few years, let’s stop and consider this encouraging sentiment. It is crucial for investors to do this, so they can judge the underlying components responsible for driving this projected increase, as there are certain implications that can impact on shareholder return. To help investors get a top level understanding, this article will interpret NMC Health’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 out our latest analysis for NMC Health
Breaking Down NMC’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. Knowing the portion of top line revenue that is turned into net income helps to assess this ability whilst spotting profit drivers, and can be found by calculating NMC’s profit margin.
Margin Calculation for NMC
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = US$185.97m ÷ US$1.60b = 11.60%
There has been a flat movement in NMC Health’s margin over the past five years, as a result of average net income growth of 22.37%, remaining within range of 23.12% in average revenue growth indicating that that the previous revenue growth has been accompanied by a stable portion being translated in to net income. The current 11.60% margin seems to continue this movement, which suggests that the increase in net income has likely occurred from a combination of top line growth and enhanced cost efficiency.
What does NMC Health’s margin expectation tell us about future earnings?
Forward looking projections suggest margins will shift towards expansion, with an expectation of 13.21% in annual revenue growth and annual net income growth forecasted at 22.01%. 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 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 NMC Health’s case, it is expected that profit margins will expand simultaneously with Healthcare industry margins, and at the same time, NMC’s forecasted ROE of 22.91% exceeds that of the expected 8.99% ROE of the industry (note that this observation is also influenced by relative debt levels). This serves as an indication of the confidence amongst analysts covering that stock that the nature of NMC Health’s earnings will result in a higher return per dollar of equity compared to the industry. 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 NMC Health’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For NMC, I’ve put together three relevant factors 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 NMC 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 NMC is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of NMC? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!