With analysts forecasting Tejas Networks Limited (NSEI:TEJASNET) to record noticeable earnings growth of 37.77% in the coming 12 months, it’s important to take a step back and reflect on this strong vision. Investors should consider the forces that are driving this growth, as there are certain implications that can impact on shareholder return. To get some insight, I will shine a light on the behaviour of Tejas Networks’s margins to assist in analysing the revenue and cost anatomy behind the earnings expectations for the future and the impact it has on shareholder returns relative to the wider industry.View our latest analysis for Tejas Networks
What can we tell from TEJASNET’s profit margin?
Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. By calculating TEJASNET’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 TEJASNET
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 1.15 Billion ÷ 9.07 Billion = 12.66%
Tejas Networks’s margin has expanded in the past five years, due to average net income growth of 58.36% exceeding average revenue growth of 20.16%, which means that the previous increase in revenue has coincided with a larger portion falling to the bottom line. The current 12.66% margin seems to continue this movement, which could imply improved cost efficiency as well as increasing revenue contributed to the previous earnings growth.
Understanding what could be driving Tejas Networks’s future earnings
It is expected that margins will further the previous expansion, with an expectation of 23.31% in annual revenue growth and 31.87% 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. 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. Profit margins are commonly useful when employed as a comparitive measure to judge a business’ profit-making ability against its industry. For Tejas Networks in particular, profit margins moving forward are forecasted to expand along with the Communications industry margins, whilst at the same time, the forecasted ROE of Tejas Networks is greater than the industry at 14.99% and 12.66% 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 Tejas Networks’s earnings will result in a higher return per dollar of equity compared to the industry. But before moving forward, it must be remembered that bottom line earnings and profit margins are susceptible to being manipulated and don’t always give the full picture. Thus, it is essential to run your own analysis on Tejas Networks’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For TEJASNET, there are three pertinent 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 TEJASNET 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 TEJASNET is currently mispriced by the market.
- 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of TEJASNET? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!