Kingsoft Corporation Limited (HKG:3888): What Is Driving Earnings Margins?

Kingsoft's promising vision for earnings in the future has analysts expecting material growth of 53.74% in the coming 12 months, but it's necessary to take a moment and evaluate this projection. It is crucial for investors to do this, so they can judge the underlying components responsible for causing this growth, as the return realised by shareholders may look different in the future if underlying assumptions are not realised. To help investors get a top level understanding, I will shine a light on the behaviour of Kingsoft’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.

Check out our latest analysis for Kingsoft

Understanding 3888's earnings with profit margin

Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. 3888's profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.

Kingsoft's margin has contracted in the past five years, due to postive average revenue growth of 27.88% and decline in net income of -5.40% 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 12.72% margin seems to continue this movement, indicating the earnings decline has been driven through an increase in costs as opposed to a reduction in revenue.

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

Forward looking projections suggest margins will transition into expansion, with an expectation of 24.37% in annual revenue growth and a forecasted 39.52% in annual net income growth. 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. However, 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.

Profit margins are commonly useful when employed as a comparitive measure to judge a business' profit-making ability against its industry. For 3888, it is expected that profit margins will expand along with the Software industry margins, and at the same time, 3888’s forecasted ROE of 9.19% exceeds that of the expected 7.89% ROE of the industry (note that this observation is also influenced by relative debt levels). This serves as an indication of the confidence amongst analysts covering that stock that the nature of Kingsoft's earnings will result in a higher return per dollar of equity compared 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 Kingsoft'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 3888, I've compiled three fundamental aspects 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 3888 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 3888 is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of 3888? 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.