With analysts expecting Huntsworth plc (LON:HNT) to produce noticeable earnings growth of 13.34% annualised over the few years to come, it’s necessary to take a moment and reflect on this positive outlook. Those invested in the stock should contemplate the factors that are spurring 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 Huntsworth’s margin performance 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 Huntsworth
What does HNT’s profit margin tell us?
Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. 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 HNT’s profit margin.
Margin Calculation for HNT
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = UK£15.67m ÷ UK£196.98m = 7.95%
The past five years have seen Huntsworth’s margin contract, as a result of 0.99% in average revenue growth and decline in net income of -24.82% on average, which suggests that a smaller percentage of revenue falls to the bottom line despite the fact revenue has increased over the previous 5 years. The current 7.95% margin seems to continue this movement, which suggests that the decrease in earnings has arisen due to difficulties in managiong costs as opposed to a lack of top line revenue.
Understanding what could be driving Huntsworth’s future earnings
Forward looking projections suggest margins will shift towards expansion, with annual revenue growth tipped at 5.51% and 13.34% earnings growth expected annually. This suggests the previous earnings decline is expected to reverse due to enhanced cost efficiency alongside revenue increases. But as a result of improved cost efficiency, net income growth is expected to exceed revenue growth, which is causing the expectation for margins to expand. Despite this, those watching the stock must know margin expansion can mean different things for different companies, thus more detailed research is essential. In many situations, looking at a company’s profit margin in relation to other similar businesses can be more informative. For Huntsworth in particular, future profit margin is expected to expand simultaneously with Media industry margins, and at the same time, HNT’s forecasted ROE of 13.10% exceeds that of the expected 9.95% ROE of the industry (note that this observation is also influenced by relative 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. 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 Huntsworth’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For HNT, I’ve put together three key 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 HNT 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 HNT is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of HNT? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!