What Is Driving Zhejiang Expressway Co Ltd's (HKG:576) Margins In The Next Few Years?

Zhejiang Expressway Co Ltd's (HKG:576) stable vision for earnings in the future has analysts expecting subtle growth of 2.77% annualised over the few years to come, but it's necessary to take a moment and evaluate this appraisal. 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 get some insight, this article will interpret Zhejiang Expressway's margin performance to help recognise the underlying make-up of revenue and expenses that is responsible for driving future earnings expectations and what it means for 576's returns relative to its competitors.

See our latest analysis for Zhejiang Expressway

What does 576'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. 576's profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.

Zhejiang Expressway's margin has expanded in the past five years, as a result of 11.71% in average net income growth exceeding 6.83% in average revenue growth, indicating that that the previous revenue growth has been accompanied by a growing portion translated in to earnings. The current 33.86% margin seems to continue this movement, indicating that earnings growth has likely been driven through improved cost management alongside the benefits of revenue growth.

Understanding what could be driving Zhejiang Expressway's future earnings

Margins are expected to move from expansion into contraction, with an expectation of 3.48% in annual revenue growth and annual net income growth forecasted at 2.77%. This suggests future earnings growth is driven further by an increase in top line revenue, which is expected to squeeze the incremental amount of net income that is retained. However, those watching the stock must know a contracting margin has different impacts on profit and return depending on the underlying situation, which reinforces the importance of deeper research.

In many situations, looking at a company's profit margin in relation to other similar businesses can be more informative. For 576, profit margins moving forward are forecasted to contract as the Infrastructure industry margins remain constant, whilst at the same time, the forecasted ROE of Zhejiang Expressway is greater than the industry at 15.09% and 10.11% respectively, although it must not be forgotten than this result is influenced by the company's debt levels. This serves as an indication of the confidence amongst analysts covering that stock that the nature of Zhejiang Expressway's earnings will result in a higher return per dollar of equity compared to the industry. 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 Zhejiang Expressway's future expectations whilst maintaining a watchful eye over the likelihood and sustainability of the top line performance that is expected to drive earnings growth.

Next Steps:

For 576, there are three key aspects you should look at:

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 576 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 576 is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of 576? 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.