What Are Analysts Saying About the future of Royal Mail plc's (LON:RMG)?

As analysts project Royal Mail plc (LSE:RMG) to record a fall in earnings of -6.12% over the next year, it's important to take a step back and reflect on this pessimistic vision. Those invested in the stock should contemplate the factors that are sparking this decline, because the sustainability of returns to shareholders can be impacted on in different ways. To get some insight, this article will interpret Royal Mail'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 our latest analysis for Royal Mail

A closer look at RMG'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. By calculating RMG's profit margin, we can take a closer look at this ability and use it to understand what is driving earnings growth.

Royal Mail's margin has expanded in the past five years, with average net income growth of 3.78% exceeding a 1.57% average growth in revenue, indicating that that the previous revenue growth has been acompanied by a growing portion translated in to earnings. RMG's most recent margin of 3.54% appears to follow this trend, indicating that earnings growth has likely been driven through improved cost management alongside the benefits of revenue growth.

How is Royal Mail’s margin expected to behave in the future and what could it mean for shareholders?

Margins are expected to continue to expand, with 1.37% in expected annual revenue growth and annual net income growth forecasted at 10.79%. 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. However, 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.

Generally, it is useful to judge profit margin and its implication on return in comparison to other companies who share similar traits. For RMG, it is expected that profit margins will expand along with the margins in the Logistics industry, and at the same time, RMG's projected ROE of 11.24% is less than the 15.18% expected ROE for the rest of industry. This suggests that analysts expect Royal Mail's return per dollar of equity will lag behind the industry as a result of the earnings attributes identified by our margin analysis. But before moving forward, it must be remembered that bottom line earnings and profit margins are susceptible to being manipulated and don't always give the full picture. Thus, it is essential to run your own analysis on Royal Mail'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 RMG, I've compiled three essential factors you should further examine:

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

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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.