What Do Analysts Think About the future of Bayer CropScience Limited's (NSE:BAYERCROP) Earnings Prospects?

Bayer CropScience's encouraging earnings sentiment drives analysts to forecast substantial growth of 55.66% over the next year, but let's stop and reflect on this appraisal. Investors should consider the forces that are 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, I will shine a light on the behaviour of Bayer CropScience’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 Bayer CropScience

Understanding BAYERCROP's earnings with profit margin

Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. By calculating BAYERCROP's profit margin, we can take a closer look at this ability and use it to understand what is driving earnings growth.

Bayer CropScience's margin has contracted in the past five years, due to a positive 5.69% average growth in revenue and decline in net income of -2.40% on average, which means that although revenue has increased, a smaller portion falls in to the bottom line. BAYERCROP's most recent margin of 10.50% appears to follow this trend, indicating the earnings decline has been driven through an increase in costs as opposed to a reduction in revenue.

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

Margins are expected to transition into expansion, with 13.76% in expected annual revenue growth and 20.19% earnings growth expected annually. 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. Nonetheless, those watching the stock must know margin expansion can mean different things for different companies, thus more detailed research is essential.

Generally, it is useful to judge profit margin and its implication on return in comparison to other companies who share similar traits. For BAYERCROP, profit margins moving forward are forecasted to expand along with the margins in the Chemicals industry, and at the same time, BAYERCROP’s forecasted ROE of 19.29% exceeds that of the expected 14.63% ROE of the industry (note that this observation is also influenced by relative 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. 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 Bayer CropScience'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 BAYERCROP, there are three relevant 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 BAYERCROP 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 BAYERCROP is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of BAYERCROP? 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.