As analysts forecast Spire Healthcare Group Plc (LSE:SPI) to produce twice as much earnings in the coming 12 months, it’s important to take a step back and consider this promising sentiment. Investors should consider the forces that are driving this projected increase, 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 Spire Healthcare Group’s margin behaviour 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 Spire Healthcare Group
A closer look at SPI’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 SPI’s profit margin.
Margin Calculation for SPI
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 16.80 Million ÷ 931.70 Million = 1.80%
The past five years have seen Spire Healthcare Group’s margin expand, as a result of a 37.61% average growth in net income outstripping 5.22% in average revenue growth, indicating that that the previous revenue growth has been acompanied by a growing portion translated in to earnings. SPI’s most recent margin of 1.80% appears to follow this trend, which could imply improved cost efficiency as well as increasing revenue contributed to the previous earnings growth.
What does Spire Healthcare Group’s margin expectation tell us about future earnings?
It is expected that margins will keep on expanding, with annual revenue growth tipped at 4.33% and a forecasted 23.82% in annual net income growth. 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, investors should realise a expanding margin can hold various implications on the company’s performance depending on how it operates, which makes further research very important. In many situations, looking at a company’s profit margin in relation to other similar businesses can be more informative. For Spire Healthcare Group in particular, future profit margin is expected to expand along with the Healthcare industry margins, whilst at the same time, the industry’s forecasted ROE of 8.74% exceeds that of the expected 5.54% ROE for SPI. This highlights that analysts believe the underlying earnings characteristics mentioned above will provide a lower return for shareholders in relation 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 Spire Healthcare 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 SPI, I’ve put together three relevant 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 SPI 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 SPI is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of SPI? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!