With analysts forecasting Kingfisher plc (LSE:KGF) to register a fall in earnings of -16.06% in the coming year, it’s necessary to take a moment and consider this damaging sentiment. Investors should consider the forces that are causing this decline, as there are certain implications that can impact on shareholder return. To help investors get a top level understanding, I will try to evaluate Kingfisher’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 Kingfisher
Understanding KGF’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. 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 KGF’s profit margin.
Margin Calculation for KGF
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 584.00 Million ÷ 11.48 Billion = 5.09%
The past five years have seen Kingfisher’s margin contract, due to 0.60% in average revenue growth and decline in net income of -2.71% on average, which means that although revenue has increased, a smaller portion falls in to the bottom line. The current 5.09% 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.
What can we tell from future expectations?
Based on future expectations, KGF’s profit margin will shift towards expansion, with annual revenue growth tipped at 2.68% and 14.95% 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 a expanding margin has different impacts on profit and return depending on the underlying situation, which reinforces the importance of deeper research. Generally, it is useful to judge profit margin and its implication on return in comparison to other companies who share similar traits. In Kingfisher’s case, future profit margin is expected to expand simultaneously with margins in the Specialty Retail industry, and at the same time, KGF’s projected ROE of 7.66% is less than the 14.06% expected ROE for the rest of industry. This suggests that analysts expect Kingfisher’s return per dollar of equity will lag behind the industry as a result of the earnings attributes identified by our margin analysis. 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 Kingfisher’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For KGF, I’ve put together three relevant factors you should look at:
- 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 KGF 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 KGF is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of KGF? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!