What Are Analysts Saying About dotDigital Group Plc's (LON:DOTD) Profit Margin?

With analysts projecting dotDigital Group Plc (AIM:DOTD) to record solid earnings growth of 33.09% over the next year, it's necessary to take a moment and evaluate this strong vision. It is crucial for investors to do this, so they can judge the underlying components responsible for causing this projected increase, as the return realised by shareholders may look different in the future if underlying assumptions are not realised. To get a preliminary understanding, I will shine a light on the behaviour of dotDigital Group’s margins 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.

View our latest analysis for dotDigital Group

What does DOTD's profit margin tell us?

At a high level, a company’s ability to earn on their sales efforts can play an important role in determining shareholder value. DOTD's profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.

There has been a contraction in dotDigital Group's margin over the past five years, with average revenue growth of 21.50% exceeding 15.97% in average net income growth, indicating that that a smaller percentage of revenue is being converted in to net income despite the top line growth. The current 20.93% margin seems to continue this movement, which could imply that increasing revenue has driven earnings growth rather than enhanced cost management.

Using dotDigital Group's margin expectations as a way to understand projections for the future

It is expected that margins will transition into expansion, with annual revenue growth tipped at 23.57% and 26.32% earnings growth expected annually. 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. Despite this, those watching the stock must know margin expansion 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 DOTD, future profit margin is expected to expand simultaneously with margins in the Software industry, whilst at the same time, DOTD’s forecasted ROE of 25.05% exceeds that of the expected 13.07% ROE of the industry. This suggests that analysts expect dotDigital Group's return per dollar of equity will exceed the industry due to the earnings attributes identified in 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 dotDigital Group's future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.

Next Steps:

For DOTD, there are three fundamental factors 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 DOTD 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 DOTD is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of DOTD? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

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.