With analysts forecasting Modern Dental Group Limited (SEHK:3600) to produce noticeable earnings growth of 33.55% in the coming 12 months, it’s necessary to take a moment and evaluate this positive outlook. 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 get a preliminary understanding, I will shine a light on the behaviour of Modern Dental Group’s margins 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 Modern Dental Group
Breaking Down 3600’s Profit Margin
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 3600’s profit margin.
Margin Calculation for 3600
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 155.37 Million ÷ 2.18 Billion = 7.12%
There has been a contraction in Modern Dental Group’s margin over the past five years, due to 19.68% in average revenue growth exceeding average net income growth of 4.24%, which means that although revenue has increased, a smaller portion falls in to the bottom line. 3600’s most recent margin of 7.12% appears to follow this trend, indicating that earnings growth has likely been driven through an increase in revenue rather than improved cost management.
Understanding what could be driving Modern Dental Group’s future earnings
Forward looking projections suggest margins will shift towards expansion, with 18.62% in expected annual revenue growth and a forecasted 23.28% 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, 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. Profit margins are commonly useful when employed as a comparitive measure to judge a business’ profit-making ability against its industry. For Modern Dental Group in particular, future profit margin is expected to expand along with the Medical Equipment industry margins, and at the same time, the forecasted ROE of Modern Dental Group is greater than the industry at 10.21% and 8.16% respectively, although it must not be forgotten than this result is influenced by the company’s 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. 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 Modern Dental 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 3600, I’ve compiled three fundamental 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 3600 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 3600 is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of 3600? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!