As analysts expect JSW Steel Limited (NSEI:JSWSTEEL) to report solid earnings growth of 42.59% in the coming 12 months, it's important to take a step back and evaluate this strong vision. Investors should consider the forces that are spurring 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 JSW Steel’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 JSWSTEEL's returns relative to its competitors.
What can we tell from JSWSTEEL's profit margin?
Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. By calculating JSWSTEEL'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 JSWSTEEL
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 32.09 Billion ÷ 621.86 Billion = 5.16%
The past five years have seen JSW Steel's margin contract, as a result of average revenue growth of 9.46% exceeding 7.96% in average net income growth, which means that although revenue has increased, a smaller portion falls in to the bottom line. The current 5.16% margin seems to continue this movement, which suggests that the increase in net income has possibly occured due to growing revenues as opposed to lowering costs.
Using JSW Steel's margin expectations as a way to understand projections for the future
It is expected that margins will shift towards expansion, with 4.68% in expected annual revenue growth and 18.76% earnings growth expected annually. 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 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 JSW Steel in particular, it is expected that profit margins will expand along with the Metals and Mining industry margins, and at the same time, the forecasted ROE of JSW Steel is greater than the industry at 17.10% and 8.11% 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 JSW Steel'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 JSW Steel's future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For JSWSTEEL, there are three relevant aspects you should further examine:
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 JSWSTEEL 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 JSWSTEEL is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of JSWSTEEL? 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 has no position in any of the companies mentioned. This article is general in nature. 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.
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