Fortis Healthcare’s negative outlook for net income drives analysts to expect a meaningful decline of -63.60% in the coming 12 months, but it’s necessary to take a moment and think through this expectation. It is crucial for investors to do this, so they can judge the underlying components responsible for causing this decrease, 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 Fortis Healthcare’s margins to help recognise the underlying make-up of revenue and expenses that is responsible for driving future earnings expectations and what it means for FORTIS’s returns relative to its competitors.View our latest analysis for Fortis Healthcare
A closer look at FORTIS’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 FORTIS’s profit margin, we can take a closer look at this ability and use it to understand what is driving earnings growth.
Margin Calculation for FORTIS
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 4.11 Billion ÷ 46.09 Billion = 8.91%
Fortis Healthcare’s margin has contracted in the past five years, with postive average revenue growth of 9.97% and decline in net income of -2.35% on average, which means that although revenue has increased, a smaller portion falls in to the bottom line. The current 8.91% margin seems to continue this movement, which implies that an increase in costs has driven down earnings whilst revenue has managed to grow.
What does Fortis Healthcare’s margin expectation tell us about future earnings?
Forward looking projections suggest margins will transition into expansion, with an expectation of 11.13% in annual revenue growth and a forecasted 24.33% 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 interested in the company should remember that a expanding 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 FORTIS, it is expected that profit margins will expand along with the margins in the Healthcare industry, whilst at the same time, FORTIS’s projected ROE of 2.62% is less than the 7.77% expected ROE for the rest of industry. This serves as an indication that analysts covering the stock expect the nature of Fortis Healthcare’s earnings will produce a lower 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 Fortis Healthcare’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For FORTIS, there are three fundamental 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 FORTIS 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 FORTIS is currently mispriced by the market.
- 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of FORTIS? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!