As analysts project Infinite Computer Solutions (India) Limited (NSE:INFINITE) to record solid earnings growth of 19.61% annualised over the couple of years ahead, let’s stop and consider this positive outlook. Investors should consider the forces that are causing this projected increase, because the sustainability of returns to shareholders can be impacted on in different ways. To get some insight, this article will interpret Infinite Computer Solutions (India)’s margin performance 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.
What can we tell from INFINITE’s profit margin?
At a high level, a company’s ability to earn on their sales efforts can play an important role in determining shareholder value. Knowing the portion of top line revenue that is turned into net income helps to assess this ability whilst spotting profit drivers, and can be found by calculating INFINITE’s profit margin.
Margin Calculation for INFINITE
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = ₹1.12b ÷ ₹27.92b = 4.00%
The past five years have seen Infinite Computer Solutions (India)’s margin contract, due to 14.71% in average revenue growth and decline in net income of -0.71% on average, which means that although revenue has increased, a smaller portion falls in to the bottom line. The current 4.00% 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.
Understanding what could be driving Infinite Computer Solutions (India)’s future earnings
Margins are expected to reverse its previous trend and start to expand, with an expectation of 11.11% in annual revenue growth and a forecasted 19.61% in annual net income growth. This suggests the previous earnings stability is expected to transition in to stronger growth through 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. Despite this, investors should realise a expanding margin can mean different things for different companies, thus more detailed research is essential. Profit margins are commonly useful when employed as a comparitive measure to judge a business’ profit-making ability against its industry. For Infinite Computer Solutions (India) in particular, profit margins moving forward are forecasted to expand at the same time as the IT industry margins remain constant, whilst at the same time, INFINITE’s forecasted ROE and the expected ROE of the industry is roughly equal at 13.37% and 13.08% respectively (note that relative debt levels need to be considered in this observation). This suggests that analysts expect Infinite Computer Solutions (India)’s return per dollar of equity will approximately match the industry as a result of the earnings attributes identified by our margin analysis. 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 Infinite Computer Solutions (India)’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For INFINITE, there are three pertinent aspects you should look at:
- 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.
- Valuation: What is INFINITE 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 INFINITE is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of INFINITE? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!