With analysts expecting Mercury NZ Limited (NZSE:MCY) to register a fall in earnings of -9.50% in the coming year, it's important to take a step back and evaluate this damaging sentiment. It is crucial for investors to do this, so they can judge the underlying components responsible for pushing this decline, as there are certain implications that can impact on shareholder return. To get a preliminary understanding, I will shine a light on the behaviour of Mercury NZ’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.See our latest analysis for Mercury NZ
Understanding MCY'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 MCY'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 MCY
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 203.00 Million ÷ 1.76 Billion = 11.54%
There has been an expansion in Mercury NZ's margin over the past five years, with average net income growth of 11.54% exceeding average revenue growth of 2.17%, which suggests that the company has been able to convert a larger percentage of revenue into net income whilst grow their top line at the same time. The current 11.54% margin seems to continue this movement, indicating that earnings growth has likely been driven through improved cost management alongside the benefits of revenue growth.
Understanding what could be driving Mercury NZ's future earnings
Margins are expected to further the previous expansion, with an expected annual fall of -1.02% in revenue and earnings expected to fall at -0.14% on an annual basis. This suggests the previous earnings growth is expected to reverse due to an expected decline in revenue as opposed to an increase in costs. This is indicated by revenue’s faster forecasted decline than net income, which is resulting in the expectation for margins to expand. However, investors should realise margin expansion 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 MCY, future profit margin is expected to expand simultaneously with margins in the Electric Utilities industry, whilst at the same time, MCY’s forecasted ROE and the expected ROE of the industry is roughly equal at 5.54% and 5.73% respectively (note that relative debt levels need to be considered in this observation). This highlights that analysts believe the underlying earnings characteristics mentioned above will provide a return for shareholders that is comparable 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 Mercury NZ's future expectations whilst maintaining a watchful eye over top line performance, because if the business is able to reverse the expected downward trend, there may be an opportunity to return to positive earnings growth and attractive returns.
For MCY, there are three important factors you should further research:
- 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 MCY 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 MCY is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of MCY? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
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.